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

Author

Listed:
  • Alexander Chudik
  • M. Hashem Pesaran
  • Kamiar Mohaddes
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 multicountry 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 are 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 & M. Hashem Pesaran & Kamiar Mohaddes, 2019. "Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR," CESifo Working Paper Series 7454, CESifo.
    • Handle: RePEc:ces:ceswps:_7454
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    References listed on IDEAS

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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: Essays in Honor of Cheng Hsiao, volume 41, pages 143-189, Emerald Group Publishing Limited.

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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 and 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; Modern Monetary Theory
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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