Filippo di Mauro

The GVAR handbook : structure and applications of a macro model of the global economy for policy analysis

The GVAR is a global Vector autoregression model of the global economy. The model was initially developed in the early 2000 by Professor Pesaran and co-authors, for the main purpose of analysing credit risk in a globalised economy. Starting from mid-2000 the model was substantially enlarged in the context of a project financed by the ECB, to comprise all major economies and the Euro area as a whole. The purpose of this version was to exploit the rich modelisation of international linkages in order to simulate and analyse global macro scenarios of high policy interest. The rich, yet manageable, specification of international linkages has stimulated a vast literature on the GVAR. Since early 2011, the basic model - and its data base - has also available on a dedicated GVAR-Toolbox website with an easy-to-use interface allowing practical applications by an extended audience, as well as more complex analysis by the expert public. The book provides an overview of the extensions and applications of the GVAR which have been developed in recent years. Such applications are grouped in three main categories: 1) International transmission and forecasting; 2) Finance applications; and 3) Regional applications. By using a language which is accessible to not econometricians, the book reaches out to the extended audience of practitioners and policy makers interested in understanding channels and impacts of international linkages. Contributors to this volume - Alexander Al-Haschimi, European Central Bank Katrin Assenmacher, Swiss National Bank Ambrogio Cesa-Bianchi, Inter-American Development Bank Stephane Dees, European Central Bank Sandra Eickmeier, Deutsche Bundesbank Carlo A. Favero, Bocconi University David Fielding, University of Otago Alessandro Galesi, European Central Bank Anthony Garratt, Birkbeck College, London Matthew Greenwood-Nimmo, University of Leeds Kevin Lee, University of Nottingham Marco J. Lombardi, European Central Bank Silvia Lui, National Institute of Economic and Social Research Filippo di Mauro, European Central Bank James Mitchell, University of Leicester Tim Ng, Reserve Bank of New Zealand, Viet Hoang Nguyen, Melbourne Institute of Applied Economic and Social Research C. Nickel, European Central Bank M. Hashem Pesaran, University of Southern California and Trinity College, Cambridge Alessandro Rebucci, Inter-American Development Bank Silvia Sgherri, International Monetary Fund Kalvinder Shields, University of Melbourne Yongcheol Shin, University of York L. Vanessa Smith, University of Cambridge Ron P. Smith, Birkbeck College, London I. Vansteenkist, European Central Bank TengTeng Xu, Bank of Canada

The external dimension of the Euro area : assessing the linkages

Preface Filippo di Mauro and Robert Anderton 1. Introduction Filippo di Mauro and Robert Anderton 2. The external dimension of the Euro area: stylised facts and initial findings Filippo di Mauro and Robert Anderton 3. Product variety and macro trade models: implications for EU Accession Countries Joseph Gagnon 4. Exchange-rate pass-through to import prices in the Euro area Jose Manuel Campa, Linda S. Goldberg and Jose M. Gonzalez-Minguez 5. The international equity holdings of Euro area investors Philip R. Lane and Gian Maria Milesi-Ferretti 6. Global linkages through foreign direct investment W. Jos Jansen and Ad C. J. Stokman 7. Shocks and shock absorbers: the international propagation of equity market shocks and the design of appropriate policy responses Ray Barrel and E. Philip Davis 8. The Euro area in the global economy: its sensitivity to the international environment and its influence on global developments Alessandro Calza and Stephane Dees Index.

Key Elements of Global Inflation

Against the background of large fluctuations in world commodity prices and global growth, combined with ongoing structural changes relating to globalization, this paper examines some of the key factors affecting global inflation. The paper empirically investigates various relative price and structural impacts on global inflation by: estimating a GVAR to examine how oil price shocks feed through to core and headline inflation; calculating the impact of increased imports from low-cost countries on manufacturing import prices; estimating Phillips curves in order to shed light on whether the inflationary process in the OECD countries has changed over time, particularly with respect to the roles of import prices, unit labour costs and the output gap. Overall, the paper finds that there seem to be various significant pressures on global trade prices and labour markets associated with structural factors possibly partly due to globalisation which, in addition to monetary policy, seem to be behind some of the changes in the inflation process over the period examined in this paper.

Where are Global and U.S. Trade Heading in the Aftermath of the Trade Collapse: Issues and Alternative Scenarios

Global and U.S. trade declined dramatically in the wake of the global financial crisis in late 2008 and early 2009. The subsequent recovery in trade, while vigorous at first, gradually lost momentum in 2010. Against this backdrop, this paper explores the prospects for global and U.S. trade in the medium term. We develop a unified empirical framework – an error correction model – that exploits the cointegrating relationship between trade and economic activity. The model allows us to juxtapose several scenarios with different assumptions about the strength of GDP growth going forward and the relationship between trade and economic activity. Our analysis suggests that during the crisis both world trade and U.S. exports declined significantly more than would have been expected on the basis of historical relationships with economic activity. Moreover, this gap between actual and equilibrium trade is closing only slowly and could persist for some time to come.

Globalisation, Regionalism and Economic Interdependence: International linkages in the context of global and regional integration

Introduction Fewer barriers to international transactions and rapidly spreading information technology lie at the root of the accelerating integration of markets worldwide. Although not a new phenomenon, ‘globalisation’ has become a popular term since the 1990s to describe the increasingly integrated and interdependent world economy, which has led to higher trade, production and services outsourcing, as well as the migration of highly skilled professionals (Hummels, 2007). As these developments have unfolded, economic integration at a regional level has also strengthened, as a result of tighter institutional arrangements as well as substantial pressure from market forces. Every single country in the world is now a member of regional trade agreements and at least one regional bloc. More than one-third of world trade takes place within such arrangements. All regional agreements have the objective of reducing barriers to trade between member countries and therefore, implicitly, of discriminating against trade with non-member countries. At their simplest level, RTAs aim at reducing or removing altogether tariffs on trade flows between member countries, with some also eliminating non-tariff barriers and liberalising investment flows. At their deepest level, RTAs have the objective of achieving economic union, implying the creation of common institutions (Schiff and Winters, 2003).

The United States and the Euro Area: What Do Structural Models Say About the Linkages?

The results so far have been based on purely empirical approaches aimed at assessing the degree of co-movement of economic activity across the two sides of the Atlantic. Such approaches however are agnostic on the reasons why certain movements occurred, which hampers their capacity to ascertain the nature and extent of the transmission mechanism from the United States to the euro area. For instance, an equally sized shock to US activity would have a smaller global spillover if caused by a purely US-specific reason, for example, a real estate market boom-bust, than if caused by some global factor, for example, an oil price increase. Among purely domestic shocks also, impacts on the rest of the world will be different depending upon their nature, that is, whether they have a demand or supply origin. For instance, a supply shock — related to the diffusion of a specific technology — will tend to impact more on potential growth than a demand shock, whose effects would be more immediate both in the US and in the rest of the world.

Business Cycle Synchronisation: The United States and the Euro Area

Over the last 40 years economic activity between the US and the euro area has been highly interrelated to an extent which goes far beyond measurable trade, financial and other links. In this chapter we systematically examine such a link to discover that it is very solid over time although possibly not so across episodes, that is, during upturns and downturns.

The US-Euro Area Relationship in a Context of Possible Systemic Changes

Following the most severe and synchronised economic downturn since the Great Depression, the global economy entered into a phase of recovery, though somewhat shallow.

Economic Interactions US-Euro Area Over the 2007–9 Financial Crisis: What Did We Learn?

Despite the long history of interdependence of global cycle developments, prior to the onset of the most recent global downturn in late 2008, there was a widely held view that the euro area — and more generally the global economy — could ‘decouple’ from the US. Somehow, the consensus was that, given its plethora of domestic problems, the US would remain the most affected country: in this ‘new world’, unlike the past, the US shocks would not necessarily become global, nor would the euro area economy necessarily be affected with a lag.

The United States and the Euro Area: The Role of Financial Variables

As we have seen before, the traditional analysis of the transmission of shocks views the trade channel as the main source of spillovers: a slowdown in the US would decrease its imports, and the associated reduction of European exports would therefore lead Europe to a period of lower growth. However, this direct trade channel can hardly account for the extent of observed spillovers, particularly as the 2007–9 global financial turmoil’s impacts on the euro area are still far from being settled. Looking at the euro area, US imports represent around 15% of the former’s exports, and the euro area exports contribute only 10% of its GDP growth. The stylised fact that the euro area lags US business cycles by a few quarters, which was discussed in detail in Chapter 2, can therefore be hardly justified, on account of rather limited trade openness.