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Exploring the International Linkages of the Euro Area: a Global VAR Analysis

  • Stephane Dees

    (European Central Bank)

  • Filippo di Mauro

    (European Central Bank)

  • M. Hashem Pesaran

    (University of Cambridge)

  • L. Vanessa Smith

    (University of Cambridge)

This paper presents a quarterly global model linking individual country vector error-correcting models in which the domestic variables are related to the country-specific foreign variables. The global VAR (GVAR) model is estimated for 26 countries, the euro area being treated as a single economy, over the period 1979-2003. It advances research in this area in a number of directions. In particular, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. It develops a sieve bootstrap procedure for simulation of the GVAR as a whole to test the structural stability of the regression coefficients and error variances, and to establish confidence bounds for the impulse responses. Finally, in addition to generalized impulse responses, the paper also considers the use of the GVAR for "structural" impulse response analysis.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 47.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:47
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