Identifying Global and National Output and Fiscal Policy ShocksUsing a GVAR - Economic Research Forum (ERF)

Identifying Global and National Output and Fiscal Policy ShocksUsing a GVAR

Alexander Chudik, Mohammad Hashem Pesaran and Kamiar Mohaddes


Date:
January, 2019

NO.
1286

Length:
112 pages

Topic:
H6. National Budget, Deficit, and Debt
C3. Multiple or Simultaneous Equation Models
E6. Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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 fromstandard 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 risein output is due to a fiscal policy shock, as compared to when the rise in output isdue 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.

Authors

Alexander Chudik

Federal Reserve bank of Dallas, Research Department


Research Fellows

Mohammad Hashem Pesaran

Professor of Economics, Cambridge University


Research Fellows

Kamiar Mohaddes

Faculty of Economics & Girton College, University of Cambridge


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