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Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR

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  • Alexander Chudik
  • Kamiar Mohaddes
  • M. Hashem Pesaran

Abstract

The paper contributes to the growing Global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multi-country setting, and the results are compared to those obtained from standard single-country VAR analysis. We find that on average (across countries) global shocks explain about one-third of the long-horizon forecast error variance of output growth, and about one-fifth of the long-run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations is exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross-country average of the median debt elasticity is 1.58 when the rise in output is due to a fiscal expansion as compared to 0.75 when the rise in output follows from a favorable output shock.

Suggested Citation

  • Alexander Chudik & Kamiar Mohaddes & M. Hashem Pesaran, 2018. "Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR," Globalization Institute Working Papers 351, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:351
    DOI: 10.24149/gwp351
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    1. Alexander Chudik & M. Hashem Pesaran & Kamiar Mohaddes, 2020. "Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR," Advances in Econometrics, in: Tong Li & M. Hashem Pesaran & Dek Terrell (ed.), Essays in Honor of Cheng Hsiao, volume 41, pages 143-189, Emerald Publishing Ltd.
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    Cited by:

    1. Chudik, Alexander & Mohaddes, Kamiar & Pesaran, M. Hashem & Raissi, Mehdi & Rebucci, Alessandro, 2021. "A counterfactual economic analysis of Covid-19 using a threshold augmented multi-country model," Journal of International Money and Finance, Elsevier, vol. 119(C).
    2. Alexander Chudik & M. Hashem Pesaran & Kamiar Mohaddes, 2020. "Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR," Advances in Econometrics, in: Tong Li & M. Hashem Pesaran & Dek Terrell (ed.), Essays in Honor of Cheng Hsiao, volume 41, pages 143-189, Emerald Publishing Ltd.

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    More about this item

    Keywords

    factor-augmented VARs; Global VARs; identification of global and country specific shocks; Bayesian analysis; public debt; output growth; debt elasticity;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H6 - Public Economics - - National Budget, Deficit, and Debt

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