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Time changing effects of external shocks on macroeconomic fluctuations in Peru: empirical application using regime-switching VAR models with stochastic volatility
Abstract
This article quantifies and analyzes the evolving impact of external shocks on Peru’s macroeconomic fluctuations in 1994Q1–2019Q4. For this purpose, we use a group of models with regime-switching time-varying parameters and stochastic volatility (RS-VAR-SV), as proposed by Chan and Eisenstat (J Appl Econ 33(4):509–532, 2018. https://doi.org/10.1002/jae.2617). The data suggest a model with contemporaneous coefficients and constant lags and intercepts, but with regime-switching variances; and point to the existence of two regimes. The IRFs, FEVDs, and HDs show that: (i) China growth shocks have a higher impact on Peru’s output growth (around 0.8%); (ii) financial shocks contract domestic output growth by 0.3% and domestic monetary policy is synchronized with Fed rate movements; (iii) external shocks explain 35% and 70% of output fluctuations under regimes 1 and 2, respectively; and (iv) China growth shocks contributed 1.0 p.p. to the 1.1-p.p. increase (around 89%) in Peru’s output growth between regimes 1 and 2. Additionally, we validate these results by performing seven robustness exercises consisting in changing priors, reordering variables, changing variables, and using four different specifications for the baseline model.
... It is important to note that all models include stochastic volatility as it is found to be empirically important: see, e.g., Clark (2011) and Chan and Eisenstat (2018b). For Peruvian evidence, see Ojeda Cunya and , Chávez and Rodríguez (2023) and Rodríguez and Vassallo (2022). ...
... For the 2000s, IPX shocks contribution to the FEVD of GDP increases for all models, passing from 10% to close to 60%. This increase can be explained by higher volatility in external variables before and after the global financial crisis, as argued in Ojeda Cunya and ; see also Chávez and Rodríguez (2023) and Rodríguez and Vassallo (2022). For this period, contribution of GC and GK shocks is reduced to 40%, especially for GK shocks in models 1 and 3 (around 10%), while the contribution of AD shocks is close to 1% and the contribution of TR shocks is close to zero. ...
... The fifth robustness exercise consists in changing growth rate of IPX with another external variable like the growth rate of the S&P GSCI used by Guevara (2018) and Ojeda Cunya and ; see also Chávez and Rodríguez (2023) and Rodríguez and Vassallo (2022). We find that our results for HDs and IRFs for GC and GK shocks are kept unchanged. ...
... The terms of trade play a crucial role in analyzing the evolution of shocks and resulting conditions in the Peruvian economy. Works by Chávez and Rodriguez (2021) and Rodríguez and Vassallo (2021) emphasize the significance of terms of trade for the Peruvian economy and the benefits generated by trade partnerships and connections with major commodity buyers, using Time-Varying Parameter Vector Autoregressive (TVP-VAR) models and stochastic volatility. The authors highlight the importance of investment as a driving and expansive force in the Peruvian economy. ...
... Refer toChávez and Rodriguez (2021) andRodríguez and Vassallo (2021). ...
Welfare measures and their assessment involve a set of indicators that, as economic thought evolves, are subject to critique. Nonetheless, the ultimate debate focuses on the quality of life and the conditions fostered by each economy. Using data from the period 1993 to 2019, this paper presents an analysis of the current account and terms of trade, highlighting the significance of these variables, as they encompass important flows and contribute to shaping market conditions and the resulting benefits. The study employs both Vector Error Correction (VECM) and Structural Vector Error Correction (SVECM) models to explore the interplay between external dynamics and their effects on the economy. The findings reveal that an export price shock has an expansive effect on investment, yet its impact on savings becomes marginally significant over time. Unexpected shocks on investment are roughly 38% reliant on external factors, of which an average of 32% is attributable to export prices, underscoring the tight correlation between investment and international market dynamics. Notably, the results indicate that external dynamics primarily exert short-term effects. Consequently, despite periods of robust growth, reduced unemployment, and poverty reduction, these indicators have not proven to be sustainable in Peru.
... Moreover, they use a historical decomposition to show that external factors are the main component in output, consumption, private investment, and public expenditure growth (thereby explaining, for instance, the potential output fall in 2000, 2008, and 2013). Finally, Guevara et al. (2023), Chávez and Rodríguez (2023) and Rodríguez et al. (2023) use variations of the TVP-VAR-SV model to show that external shocks are important in Peru's economic activity. This document is part of this type of literature with the aim of providing evidence on the time-varying impact of external shocks on output growth, inflation and interest rate; as well as the role played by the volatility of these shocks. ...
... This indicates that a smooth and continuous change in the variance, the VAR coefficients, and the intercepts are preferable to an abrupt and discrete change, as in the RS models, and therefore we discard them in this study. Chávez and Rodríguez (2023) estimate an extension of the RS-VAR-SV models, with similar results as ours. ...
This study uses a family of VAR models with time-varying parameters and stochastic volatility (TVP-VAR-SV) to analyze the impact of external shocks on output growth and inflation in Peru in 1992Q1-2017Q1. The statistical relevance of the models is assessed using the deviance information criterion (DIC) and the marginal log-likelihood calculated using the cross-entropy method. The results show that: (i) it is more relevant to introduce SV than TVP; i.e., the best fitting model admits only varying intercepts and SV; and TVP-VAR and CVAR are the least performing models; (ii) the models’ impulse response functions indicate that the impacts from external shocks are different under high inflation, economic crisis, and monetary policy change, with a greater impact in episodes of high uncertainty; (iii) the impact and importance of external shocks have increased over time; and (iv) the results are robust to changes in the priors, the lag structure, order of the variables, the choice of the external variable, and the selection of the variable for domestic economic activity.
... 24 and …nancial crises, both international (Asian crisis, Russian crisis, FX crises in Argentina and Brazil, and the dot-com crash) and domestic (sudden stop in capital ‡ows triggered by the Russian crisis), the local currency depreciated signi…cantly against the dollar. 25 However, the ERPT into import prices for other Latin American economies like Colombia (where transactions dollarization is almost nil) are similar to our …ndings. In this line, Rincón-Castro and Rodríguez-Niño (2018) indicate that ERPT endogeneity to the state of the economy and non-linear nature contribute to explaining its evolution. ...
... The latter are associated with commodities and external in ‡ation. In this regard, Rodríguez et al. (2018), Chávez and Rodríguez (2022), Ojeda Cunya and , and Rodríguez and Vassallo (2022) show evidence of the relevance of external shocks for the economic performance of Peru and Paci…c Alliance countries. In line with Miller (2003), we replace the XPI with the GPIAC, S&P GSCI, copper price, and terms of trade growth rates. ...
Utilizamos un conjunto de modelos VAR con parámetros variables en el tiempo y volatilidad estocástica (TVP-VAR-SV) para estimar la evolución del efecto traspaso del tipo de cambio (ERPT) a precios para Perú en el periodo 1995Q2-2019Q4. Según dos criterios de selección de Bayesiana, los modelos que mejor se ajustan a los datos permiten que la mayoría de los parámetros y las varianzas evolucionen en el tiempo. Los resultados se dividen en dos partes: (i) los ERPTs a los precios de importación y producción disminuyen significativamente desde el final de la década de 1990 hasta 2008. Sin embargo, desde 2014, ambos ERPTs resurgen considerablemente debido a la depreciación del tipo de cambio asociada con el final de la flexibilización cuantitativa (QE), caída de los precios de las materias primas y eventos políticos globales. Estos hallazgos están en línea con la literatura reciente utilizando modelos TVP-VAR-SV y que enfatizan el resurgimiento del ERTP después de la crisis financiera mundial (GFC); (ii) el ERPT a los precios del consumidor ha declinado constantemente a lo largo de la muestra. Esto está en línea con la existente literatura y se explica por un contexto de baja inflación bajo un régimen de metas explícitas de inflación (IT) y por la fuerte credibilidad del Banco Central. Finalmente, los resultados son robustos a un conjunto de ejercicios de sensibilidad, incluyendo cambios en las variables asociadas con los choques externos y la actividad económica doméstica, así como en los valores de las priors; y una estimación del ERPT para Colombia.
... In recent years, there has been a growing uptake of advanced techniques to address these complex economic challenges. These techniques include modified traditional econometric models, such as vector autoregressive (VAR) with error correction models and co-integration analysis (see, for instance, Chávez and Rodríguez [1]). Bayesian models have also acquired relevance by allowing the incorporation of a priori information and the quantification of parameter uncertainty [2,3]. ...
... Fig. 6 depicts the evolution of GDP FEVDs for horizons 2, 12, and 20, disaggregating uncertainty by shock type. XPI shocks significantly contribute to GDP variability during the commodity price boom and the GFC (2004Q1-2010Q2) Chávez and Rodríguez, 2023;. However, their contribution declines substantially over the rest of the sample. ...
... There is abundant empirical evidence on the role of external shocks in the performance of emerging economies such as Peru, see for example, Rodríguez et al. (2018Rodríguez et al. ( , 2023Rodríguez et al. ( , 2024 and Chávez and Rodríguez (2023). Therefore, in line with Miller (2003), this robustness exercise consists of changing the variable associated with external demand in the baseline model (export prices inflation rate) for the Global Price of Metal Index growth rate. ...
This study examines the evolution of exchange rate pass-through (ERPT) into import, producer, and consumer prices in Peru from 1995Q2 to 2022Q4 using time-varying parameter and stochastic volatility VAR models. Findings reveal a resurgence of ERPTs into import and producer prices since 2009, particularly during the period of a strong US dollar following the 2013 taper tantrum and from 2020 to 2022. Increased uncertainty surrounding the exchange rate and future macroeconomic policies, triggered by the political uncertainty following the 2021 general elections, may have contributed to this trend. Short-term ERPT exceeds long-term ERPT, which might reflect prevalent price dollarization in Peru's import and producer prices. Consumer ERPT remained stable at around 10% until 2009, then increased to 15%, indicating lower levels of price dollarization. This paper sheds light on ERPT dynamics in Peru, carrying implications for policymakers in emerging economies.
... This methodology implies revisiting the traditional view that external factors are the main source of macroeconomic fluctuations in EMEs (Calvo et al., 1993;Mendoza, 1995;Kose, 2002;Izquierdo et al., 2007;Rodríguez et al., 2018;Ojeda Cunya and Rodríguez, 2022;Chávez and Rodríguez, 2023;Guevara et al., 2023, among others) in contrast with a body of research that maintains that the impact of external factors on EMEs is overestimated (Lubik and Teo, 2005;Aguirre, 2011;Schmitt-Grohé and Uribe, 2018). We provide evidence to establish whether the impact of external shocks on GDP growth, inflation, and interest rates has evolved over time. ...
Given Pacific Alliance (PA) countries’ dependence on the external sector amidst volatile global financial conditions and increased trade openness, it is important to understand the time-varying impact of external shocks on these economies to asses their resilience. We use data for 1994Q1-2019Q4 and VAR models with
time-varying parameters and stochastic volatility to study the heterogeneity of responses to financial, real, and nominal external shocks. The results suggest that external shocks have played a significant role in domestic cycles (50% on average), but their impact became temporarily larger during the global low-interest-rate period; i.e., the impact of export price and Fed rate shocks on GDP increased the most, peaking in 2002–2011, whereas the effect of shocks originating in China, although the largest, remained stable. In addition, a more predictable
and countercyclical monetary policy in response to commodity price shocks diminished the transmission of external shocks, thereby increasing PA economies’ external resilience.
This study investigated the effect of U.S dollar exchange rate fluctuations on the purchasing power of Naira and the pricing strategies of local traders in Nigeria. The study adopted a mixed research design (descriptive and ex-post facto). For the descriptive survey, the study population covers all the local sellers in all the main markets across Nigeria's six (6) geopolitical zones. The sampled size covered 1440 local traders in the markets across the geopolitical zones using a multi-stage Original Research Article Alabi et al.; Asian J. Econ. Busin.
This article employs a family of VAR models with time-varying parameters and stochastic volatility (TVP-VAR-SV) to estimate the impact of external financial uncertainty shocks on a set of macroeconomic variables in Peru for the period from 1996Q1 to 2022Q4. The main findings can be summarized as follows: (i) a simple VAR model with stochastic volatility is sufficient to capture uncertainty dynamics compared to TVP-VAR alternatives; (ii) uncertainty shocks have a negative and significant impact on private investment growth in the medium and long term; (iii) the impact on private investment growth is three times greater than that on GDP growth; (iv) uncertainty shocks behave like aggregate supply shocks, leading to an increase in the inflation rate; and (v) uncertainty shocks have stronger effects in scenarios characterized by unfavorable financial conditions.
We investigate the evolution of the impact of monetary policy (MP) shocks in Peru in 1996Q1-2018Q2 using a
set of time-varying parameter VAR models with stochastic volatility (TVP-VAR-SV), as proposed by Chan and
Eisenstat (2018). The main results are: (i) the volatility of MP shocks falls during the Inflation Targeting (IT)
regime; (ii) a contractionary MP shock decreases both GDP growth and inflation within a five quarters time
span; (iii) the interest rate reacts faster to aggregate supply shocks than to both aggregate demand shocks and
exchange rate shocks; (iv) under the pre-IT regime, MP shocks explain 20%, 10%, and 85% of the uncertainty
in GDP growth, inflation, and the interest rate, respectively; and under the IT regime, all these percentages
shrink to 1%–2%. The sensitivity analysis confirms the robustness of the main results. In general, the results
show that MP has contributed to diminishing macroeconomic volatility in Peru.
Este trabajo cuantifica el impacto de un conjunto de choques externos sobre la economía peruana, los cuales son caracterizados como: i) demanda, ii) oferta, iii) financieros, y iv) precios de exportación. Utilizando datos entre 1995 y 2019, se estiman modelos VAR bayesianos con bloque exógeno, los cuales son identificados mediante restricciones de ceros y signos. Los resultados sugieren que la economía peruana está altamente expuesta a choques externos, los cuales explican alrededor del 60% de la varianza de las variables domésticas. A partir del análisis de descomposición de varianza del error de predicción, descomposición histórica, y funciones impulso-respuesta, se encuentra que los choques de demanda externa son los más relevantes para explicar la dinámica del PBI doméstico, la inflación y el tipo de cambio. Los choques de oferta externa tienen un mayor efecto sobre la inflación local, mientras que choques financieros externos tienen efectos más relevantes y duraderos sobre la tasa de interés doméstica. Por último, los choques de precios de exportación tienen efectos significativos sobre la devaluación cambiaria.
Transmisión de choques de política monetaria de Estados Unidos sobre América Latina: Un enfoque GVAR
Este artículo proporciona evidencia empírica sobre la evolución del impacto de los choques externos en la dinámica macroeconómica de los países de la Alianza del Pacífico (AP). Para ello estimamos una familia de modelos VAR que permite la variación (o constancia) temporal de los parámetros, incluyendo la matriz de varianzas (TVP-VAR-SV). Los resultados sugieren que: (i) las fluctuaciones de China crean las respuestas más significativas y persistentes: un aumento del 1% en el crecimiento de China aumenta el crecimiento en un 0.3%-0.4% durante el primer año en Chile, Colombia y México; y un 0.8% en Perú; (ii) las respuestas a los choques de precios de exportación evolucionan considerablemente con el tiempo; por ejemplo, el impacto sobre el crecimiento en Chile y Perú se triplicó en 1994-2009 y luego se moderó hasta 2019; y (iii) los aumentos inesperados de la tasa de la Fed dan como resultado aumentos significativos en las tasas de política monetaria de los países AP, un efecto que aumenta durante los períodos de crisis y profundiza aún más el impacto negativo en el crecimiento de la producción interna. Adicionalmente, la descomposición de la varianza muestra que los factores externos explican más del 50% de las desviaciones en las variables domésticas consideradas en este trabajo. En particular, los resultados muestran que la absorción de choques externos sobre la muestra es mayor en México y Perú. En contraste, el cambio en la dinámica interna en ausencia de perturbaciones externas hubiera sido más leve en Chile y Colombia. Finalmente, realizamos cuatro ejercicios de robustez, que implican las siguientes modificaciones al modelo de base: (i) cambio de priors; (ii) modificación de dos variables externas; (iii) uso de modelos de menor dimensión (4, 5 y 6 variables); y (iv) ampliar el modelo agregando una variable de política fiscal. Los resultados no cambian significativamente en relación con los encontrados utilizando el modelo de referencia.
Este estudio utiliza una familia de modelos VAR con coeficientes cambiantes en el tiempo y volatilidad estocástica (TVP-VAR-SV) para analizar el impacto de los choques externos en el crecimiento de la producción y la inflación en el Perú en 1992Q1-2017Q1. La relevancia estadística de los modelos se evalúa utilizando el criterio de información de desviación (DIC) y la verosimilitud marginal calculada utilizando el método de entropía cruzada (CE). Los resultados muestran que: (i) es más relevante introducir SV que TVP; es decir, el mejor modelo de ajuste admite solo interceptos variables y SV; y TVP-VAR y CVAR son los modelos menos favorecidos por los datos; (ii) las funciones impulso respuestas de los modelos indican que los impactos de los choques externos son diferentes bajo alta inflación, crisis económica y el cambio de política monetaria, con un mayor impacto en los episodios de alta incertidumbre; (iii) el impacto y la importancia de los choques externos ha aumentado con el tiempo; y (iv) los resultados son robustos a los cambios en las priors, la estructura de rezagos, el orden de las variables, la variable externa y la variable para la actividad económica doméstica.
Este artículo analiza la evolución de la política monetaria (PM) en Perú en 1996T1-2016T4 utilizando un modelo autorregresivo de vectores de parámetros variables en el tiempo de innovación mixta con volatilidad estocástica (TVP-VAR-SV) propuesto por Koop et al. (2009). Los principales resultados empíricos son: (i) los coeficientes VAR y las volatilidades cambian más gradualmente que los errores de covarianza en el tiempo; (ii) la volatilidad de los shocks de PM fue mayor bajo el régimen de Metas de Preinflación (IT); (iii) un aumento sorpresivo de la tasa de interés produce caídas en el crecimiento del PIB y reduce la inactivación en el largo plazo; (iv) la tasa de interés reacciona más rápidamente a los choques de oferta agregada (AS) que a los choques de demanda agregada (DA); (v) Los shocks de MP explican un alto porcentaje del comportamiento de las variables domésticas bajo el régimen anterior a TI, pero su contribución disminuye bajo el régimen de TI.
Around half of Peru’s public investment is made by local governments. Through the estimation of a dynamic panel data model for 1796 local governments between 2010 and 2018, we find that the most important drivers for local public investment are: (i) availability of funding sources, especially those associated to non-renewable natural resource revenues; (ii) variables associated with each local government’s capacity to plan, budget and execute public investment; and (iii) political budget cycle effects, especially during the year following local elections. Furthermore, we extend our analysis by differentiating between local governments with reelected and non-reelected authorities, and by grouping local governments according to their economic size. Most of our results are shown to be robust across different specifications. Results from this paper can be used as a starting point to design mechanisms that make public investment more stable and predictable in a context where reelection banning can further deepen public investment’s fall.
This paper presents evidence on the macroeconomic adjustment of a resource‐rich country to a resource boom using the effects of Chinese industrialization on Australia from 1988 to 2016. An SVAR model is specified, incorporating a proxy for Chinese resource demand and commodity prices to identify the effects of commodity supply and demand shocks on the Australian macroeconomy. We develop a multivariate historical decomposition to show how resource sector shocks lead the economy to deviate from a long‐run projection. The paper identifies four phases of the transmission of the resource boom before its conclusion in 2015.
The present paper analyzes how shocks to the copper price affect the economy of Chile, the world’s largest producer of this metal. Chile is an interesting case study, it being an emerging commodity producing economy that has a fiscal rule, which explicitly takes into account the expected future copper price, and has adopted an inflation targeting monetary policy with a fully floating exchange rate. The empirical analysis consists in estimating structural vector autoregressive models where the shocks are identified by sign restrictions in order to make the distinctions of those caused by increasing world demand, decreasing copper supply, and specific copper demand, e.g., speculation in future price increases. Positive copper price shocks, independently of the source, result in an appreciated currency, whereas the effects on the other macroeconomic variables do depend on the source of the shock. While demand shocks affect the Chilean gross domestic product positively, this is not the case when the copper price increases because of a supply-side event or a specific copper demand. Particularly, the activity in the mining sector is affected, while the non-mining sector expands only when the shock is caused by increasing world demand. One explanation could be the stabilizing effect of the fiscal rule. The impacts on inflation and the interest rate are correlated because of the inflation targeting monetary policy.
We develop importance sampling methods for computing two popular Bayesian model comparison criteria, namely, the marginal likelihood and the deviance information criterion (DIC) for time-varying parameter vector autoregressions (TVP-VARs), where both the regression coefficients and volatilities are drifting over time. The proposed estimators are based on the integrated likelihood, which are substantially more reliable than alternatives. Using US data, we find overwhelming support for the TVP-VAR with stochastic volatility compared to a conventional constant coefficients VAR with homoskedastic innovations. Most of the gains, however, appear to have come from allowing for stochastic volatility rather than time variation in the VAR coefficients or contemporaneous relationships. Indeed, according to both criteria, a constant coefficients VAR with stochastic volatility outperforms the more general model with time-varying parameters.
Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy model for a net commodity exporter to quantitatively study the triggers of these cycles. The economy consists of two sectors, one of which produces commodities with prices subject to exogenous international fluctuations. These fluctuations affect both the competitiveness of the economy and its borrowing terms, as higher commodity prices are associated with lower spreads between the country's borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption, and investment, and a negative effect on the total trade balance. Furthermore, they generate excess volatility of consumption over output and a large volatility of investment. Besides explicitly incorporating a double role of commodity prices, the model structure nests the various candidate sources of shocks proposed in previous work on emerging economy business cycles. Estimating the model on Argentine data, we find that the contribution of commodity price shocks to fluctuations in post-1950 output growth is in the order of 38%. In addition, commodity prices account for around 42% and 61% of the variation in consumption and investment growth, respectively. We find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which, though smaller, is not negligible.
This paper uses a common trend model, following King et al. (Am Econ Rev 81:819–840, 1991), Mellander et al. (J Appl Econ 7(4):369–394, 1992), and Warne (A common trends model: identification, estimation and inference. Seminar Paper 555, Institute for International Economic Studies, Stockholm University, 1993), to evaluate, for 1994–2015, the role of the terms of trade vis-à-vis domestic productivity in explaining macroeconomic fluctuations in Peru. Our results show that Peru’s macroeconomic aggregates share two common trends: an external one, associated with the evolution of the terms of trade; and a domestic one, linked to the evolution of domestic productivity. The external common trend has a larger impact on private investment and public expenditure than on consumption and output, a result consistent with the role of investment in absorbing income volatility. The permanent terms of trade (foreign) shocks account for most of the volatility in output, consumption, private investment, and public expenditure. This result appears more pronounced as the time horizon approaches the long term.
The paper presents and estimates a model of the prices of oil and other storable commodities, a model that can be characterized as reflecting the carry trade. It focuses on speculative factors, here defined as the trade-off between interest rates on the one hand and market participants' expectations of future price changes on the other hand. It goes beyond past research by bringing to bear new data sources: survey data to measure expectations of future changes in commodity prices and options data to measure perceptions of risk. Some evidence is found of a negative effect of interest rates on the demand for inventories and thereby on commodity prices and positive effects of expected future price gains on inventory demand and thereby on today's commodity prices.
This paper presents a structural dynamic factor model of a small commodity-exporting economy using Canada as a representative case study. Combining large panel data sets of the global and Canadian economies, we first identify those demand and supply shocks that explain most of the volatility in real commodity prices. Next we quantify their dynamic effects on a wide variety of variables for this economy. We are able to reproduce all the main stylized facts documented in the literature about business cycles in these countries. This includes spending and Dutch disease effects which have proven difficult to find in models where the innovations to commodity prices are not properly identified. Our results are quite robust to different identification schemes of the shocks.
The main goal of this paper is to describe the characteristics of business cycle in Peru during 1950-1996, and to show the importance of external shocks for these economic fluctuations. The pattern of economic fluctuations in Peru, in particular the pattern of recessions, seems to be independent of the growth strategy followed (ISI or export of raw materials). The periods of recession are periods of accelerating inflation and of balance of payments crises. Five out of six of the identified recessions are associated with adverse external shocks.
Este artículo busca extraer lecciones de política que permitan enfrentar con éxito la crisis actual, a partir de la experiencia obtenida de la crisis rusa de 1998.
In creating an index that measures the extent of openness in capital account transactions, the authors address the lack of proper ways of measuring the extent of the openness in cross-border financial transactions. The data are available for 181 countries for 1970-2005.
Existing results on the contribution of terms of trade and world interest rate shocks to output fluctuations in small open economies range from less than 10% to almost 90%. We argue that an identification problems lies at the heart of these vastly di¤erent results. In this paper, we overcome this by estimating a DSGE model using a structural Bayesian estimation approach. We apply our methodology to five developed and developing economies.. Our approach allows us to e?ciently exploit cross-equation restrictions implied by the structural model. We find that world interest rate shocks are the main driving forces of business cycles in small open economies while terms of trade shocks are not.
This article discusses the evolution of monetary policy (MP) in Peru in 1996Q1–2019Q4 using a mixture innovation time-varying parameter vector autoregressive (VAR) model with stochastic volatility (TVP-VAR-SV) as proposed by Koop, Leon-Gonzales and Strachan. The main empirical results are: (i) the VAR coefficients and volatilities change more gradually than the contemporaneous coefficients over time; (ii) the volatility of MP shocks was higher under the pre-Inflation Targeting (IT) regime; (iii) a surprise increase in the interest rate produces gross domestic product (GDP) growth falls and reduces inflation in the long run; (iv) the interest rate reacts more quickly to aggregate supply shocks than to aggregate demand shocks; (v) MP shocks explain a high percentage of domestic variables behavior under the pre-IT regime but their contribution decreases under the IT regime. Overall, these results show that MP has contributed in Peru to lower macroeconomic volatility by (i) reducing average long-term inflation, (ii) increasing the response of GDP growth rate to interest rate, and (iii) by becoming more predictable.
Both state-space models and Markov switching models have been highly productive paths for empirical research in macroeconomics and finance. This book presents recent advances in econometric methods that make feasible the estimation of models that have both features. One approach, in the classical framework, approximates the likelihood function; the other, in the Bayesian framework, uses Gibbs-sampling to simulate posterior distributions from data.
The authors present numerous applications of these approaches in detail: decomposition of time series into trend and cycle, a new index of coincident economic indicators, approaches to modeling monetary policy uncertainty, Friedman's "plucking" model of recessions, the detection of turning points in the business cycle and the question of whether booms and recessions are duration-dependent, state-space models with heteroskedastic disturbances, fads and crashes in financial markets, long-run real exchange rates, and mean reversion in asset returns.
We explore the hypothesis that fluctuations in commodity prices are an important driver of business cycles in small emerging market economies (EMEs). First, we document that commodity prices exhibit strong comovement with other macro variables along the business cycle of these economies; and that a common factor accounts for most of the time series dynamics of these commodity prices. Guided by these stylized facts, we embed a commodity sector into a dynamic, stochastic, multi-country business cycle model of EMEs where exogenous fluctuations in commodity prices coexist with other driving forces. Commodity prices follow a common dynamic factor structure in the model. When estimated with EMEs data, the model gives to commodity shocks, mostly in the form of perturbations to their common factor, a paramount role when accounting for aggregate dynamics: more than a third of the variance of real output across the EMEs considered is associated to commodity price shocks. The model also performs well when accounting for other business cycle facts. A further amplification mechanism is a “spillover” effect from commodity prices to interest rates. Yet, sometimes, positive commodity price shocks have also cushioned other negative domestic shocks, particularly during the fast recovery from the world financial crisis.
According to conventional wisdom, terms-of-trade shocks represent a major source of business cycles in emerging and poor countries. This view is largely based on the analysis of calibrated business-cycle models. We argue that the view that emerges from empirical SVAR models is strikingly different. We estimate country-specific SVARs using data from 38 countries and find that terms-of-trade shocks explain less than 10 percent of movements in aggregate activity. We then estimate key structural parameters of a three-sector business-cycle model country by country and find a disconnect between the importance assigned to terms-of-trade shocks by theoretical and SVAR models.
We show that policy uncertainty about how the rising public debt will be stabilized accounts for the lack of deflation in the US economy at the zero lower bound. We first estimate a Markov-switching VAR to highlight that a zero-lower-bound regime captures most of the comovements during the Great Recession: a deep recession, no deflation, and large fiscal imbalances. We then show that a microfounded model that features policy uncertainty accounts for these stylized facts. Finally, we highlight that policy uncertainty arises at the zero lower bound because of a trade-off between mitigating the recession and preserving long-run macroeconomic stability.
SVAR models that include a single world price (such as the terms-of-trade) predict that world shocks explain a small fraction of movements in domestic output (typically less than 10 percent). This paper presents an empirical framework in which multiple commodity prices transmit world disturbances. Estimates on a panel of 138 countries over the period 1960-2015 indicate that world shocks explain on average 33 percent of output fluctuations in individual economies. This figure doubles when the model is estimated on post 2000 data. The findings reported here suggest that one-world-price specifications significantly underestimate the importance of world shocks for domestic business cycles.
Monetary policy and the private sector behaviour of the U.S. economy are modelled as a time varying structural vector autoregression, where the sources of time variation are both the coefficients and the variance covariance matrix of the innovations. The paper develops a new, simple modelling strategy for the law of motion of the variance covariance matrix and proposes an efficient Markov chain Monte Carlo algorithm for the model likelihood/posterior numerical evaluation. The main empirical conclusions are: (1) both systematic and non-systematic monetary policy have changed during the last 40 years - in particular, systematic responses of the interest rate to inflation and unemployment exhibit a trend toward a more aggressive behaviour, despite remarkable oscillations; (2) this has had a negligible effect on the rest of the economy. The role played by exogenous non-policy shocks seems more important than interest rate policy in explaining the high inflation and unemployment episodes in recent U.S. economic history.
After skyrocketing over the past decade, commodity prices have remained stable or eased somewhat since mid-2011—and most projections suggest they are not likely to resume the upward trend observed in the last decade. This paper analyzes what this turn in the commodity price cycle may imply for output growth in Latin America and the Caribbean. The analysis suggests that growth in the years ahead for the average commodity exporter in the region could be significantly lower than during the commodity boom, even if commodity prices were to remain stable at their current still-high levels. Slower-than-expected growth in China represents a key downside risk. The results caution against trying to offset the current economic slowdown with demand-side stimulus and underscore the need for ambitious structural reforms to secure strong growth over the medium term.
The sources of macroeconomic fluctuations in sub–Saharan African are examined by comparing the CFA franc countries with the non–CFA franc countries. External shocks, especially terms of trade shocks, appear to have a greater influence on fluctuations of output and the real exchange rate in CFA franc countries. This result does not appear to be associated with differences in the economic structure but may reflect the fixed exchange rate regime, which does not (partially) buffer these countries from external shocks. Macroeconomic fluctuations in non–CFA franc countries are similar to those in other developing countries, particularly in Latin America.
This paper studies the macroeconomic impact of financial fragmentation in the euro area by analysing the role of credit supply shocks during the recent pre-crisis, bust, and post-crisis periods. We estimate a time-varying parameter vector autoregression (TVP-VAR) with stochastic volatility à la Primiceri (2005) for euro area countries, and we identify the structural shocks by imposing sign restrictions on impulse response functions based on the theoretical model by Gerali et al. (2010). The results suggest that credit supply shocks have been an important driver of business cycle fluctuations in euro area countries, and that their effects on the economy have generally increased since the recent crisis. More specifically, we find evidence that credit supply shocks contributed positively to output growth during the pre-crisis period and negatively during the downturn in economic activity in 2008-2009 in all the countries considered. In the post-crisis period, by contrast, we observe a strong rise in cross-country heterogeneity, reflecting financial fragmentation in the euro area associated with the sovereign debt crisis and weaker banks’ balance sheets. Although this heterogeneity across euro area countries started to decline around 2012, the contribution of credit supply shocks to GDP growth and credit growth remained negative in most euro area countries in mid-2013 (the end of our sample), suggesting that constraints in the supply of credit continued to weaken economic activity.
This paper employs an approximation that makes a nonlinear term structure
model extremely tractable for analysis of an economy operating near the zero
lower bound for interest rates. We show that such a model offers an excellent
description of the data compared to the benchmark model and can be used to
summarize the macroeconomic effects of unconventional monetary policy.
Our estimates imply that the efforts by the Federal Reserve to stimulate the
economy since July 2009 succeeded in making the unemployment rate in
December 2013 1% lower, which is 0.13% more compared to the historical
behavior of the Fed.
Shocks to aggregate activity in China have a significant and persistent short-run impact on the price of oil and some base metals. In contrast, shocks to apparent commodity-specific consumption (in part reflecting inventory demand) have no effect on commodity prices. China’s impact on world commodity markets is rising but, perhaps surprisingly, remains smaller than that of the United States. This is mainly due to the dynamics of real activity growth shocks in the U.S, which tend to be more persistent and have larger effects on the rest of the world.
In the context of Bayes estimation via Gibbs sampling, with or without data augmentation, a simple approach is developed for computing the marginal density of the sample data (marginal likelihood) given parameter draws from the posterior distribution. Consequently, Bayes factors for model comparisons can be routinely computed as a by-product of the simulation. Hitherto, this calculation has proved extremely challenging. Our approach exploits the fact that the marginal density can be expressed as the prior times the likelihood function over the posterior density. This simple identity holds for any parameter value. An estimate of the posterior density is shown to be available if all complete conditional densities used in the Gibbs sampler have closed-form expressions. To improve accuracy, the posterior density is estimated at a high density point, and the numerical standard error of resulting estimate is derived. The ideas are applied to probit regression and finite mixture models.
This paper presents a quarterly global model combining 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. Using average pair-wise cross-section error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international co-movements of business cycles. It develops a sieve bootstrap procedure for simulation of the GVAR as a whole, which is then used in testing the structural stability of the parameters, and for establishing bootstrap confidence bounds for the impulse responses. Finally, in addition to generalized impulse responses, the current paper considers the use of the GVAR for ‘structural’ impulse response analysis with focus on external shocks for the euro area economy, particularly in response to shocks to the US. Copyright © 2007 John Wiley & Sons, Ltd.
It is argued that in structural vector autoregressive (SVAR) analysis a Markov regime switching (MS) property can be exploited to identify shocks if the reduced form error covariance matrix varies across states. The model setup is formulated and discussed and it is shown how it can be used to test restrictions which are just-identifying in a standard structural vector autoregressive analysis. The approach is illustrated by two SVAR examples which have been reported in the literature and which have features that can be accommodated by the MS structure.
This paper studies the sources of economic fluctuations and their implications for exchange rate regime choice in key Latin American countries. In general, external shocks play a limited role in driving output fluctuations in these countries; this absence of common business cycles undermines the case for fixed exchange rates. On the other hand, although there is some evidence that real exchange rates depreciate in response to adverse external shocks, this depreciation, in turn, tends to contract output in the short run. This suggests that exchange rate rigidity may not be as costly for these economies as conventional economic theory predicts.
We construct estimates of external assets and liabilities for 145 countries for 1970–2004. We describe our estimation methods and key features of the data at the country and global level. We focus on trends in net and gross external positions, and the composition of international portfolios. We document the increasing importance of equity financing and the improvement in the external position for emerging markets, and the differing pace of financial integration between advanced and developing economies. We also show the existence of a global discrepancy between estimated foreign assets and liabilities, and identify the asset categories accounting for this discrepancy.
This paper develops a new and easily implementable necessary and sufficient condition for the exact identification of a Markov-switching SVAR model. The theorem applies to models with both linear and some nonlinear restrictions on the structural parameters. We also derive efficient MCMC algorithms to implement sign and long-run restrictions in Markov-switching SVARs. Using our methods, four well-known identification schemes are used to study whether monetary policy has changed in the euro area since the introduction of the European Monetary Union. We find that models restricted to only time-varying shock variances dominate other models. We find a persistent post-1993 regime that is associated with low volatility of shocks to output, prices, and interest rates. Finally, the output effects of monetary policy shocks are small and uncertain across regimes and models. These results are robust to the four identification schemes studied in this paper
Financial institutions such as banks are ultimately exposed to macroeconomic fluctuations I the countries to which they have exposure, the most acute example being commercial lending to companies whose fortunes fluctuate with aggregate demand. This risk management need for financial institutions motivated us to build a compact global macroeconomic model capable of generating (point as well as density) forecasts for a core set of macroeconomic factors for a set of regions and countries which explicitly allows for interconnections and interdependencies that exist between national and international factors. This paper provides such a global modeling framework; making use of recent advances in the analysis of cointegrating systems. In an unrestricted VAR(p) model in k endogenous variables covering N countries, the number of unknown parameters will be unfeasibly large, of order p(kN-1), requiring a more parsimonious model specification. We first estimate individual country/region specific vector error correcting models, where the domestic macroeconomic variables are related to corresponding foreign variable constructed exclusively to match the international trade pattern of the country under consideration. The individual country models are then combined in a consistent and cohesive manner to generate forecasts for all the variables in the world economy simultaneously. We estimate the model for 26 countries grouped into 11 regions using quarterly data from 1970Q1 to 1999Q1 and shed light on the degree of regional interdependencies by investigating the time profile of the transmission of shocks to one variable in a given country/region to the rest of the world. We then use the estimated global model as the economic engine for generating a conditional loss distribution of a credit portfolio and illustrate the effects of various global risk scenarios on the loss distribution.
This paper analyzes the relevance of external factors in average quarterly GDP growth for 1990-2006 in the seven largest Latin American countries (LAC7). Modeling the relationship between LAC7 GDP and several external factors, it is found that those factors account for a significant share of variance in LAC7 GDP growth, and that external shocks produce significant responses. Likewise, a significant share of recent LAC7 growth performance can be explained by an external factor “tailwind. ” Also evaluated is the impact of deterioration in external financial conditions. Finally, the relevance of these findings for policy evaluation is emphasized. Growth performance, the strength or weakness of macroeconomic fundamentals and the impact of domestic macro and micro policies on growth can only be properly appraised by first filtering out the effects of external factors.
I study whether and how US shocks are transmitted to eight Latin American countries. US shocks are identified using sign restrictions and treated as exogenous with respect to Latin American economies. Posterior estimates for individual and average effects are constructed. US monetary shocks produce significant fluctuations in Latin America, but real demand and supply shocks do not. Floaters and currency boarders display similar output but different inflation and interest rate responses. The financial channel plays a crucial role in the transmission. US disturbances explain important portions of the variability of Latin American macrovariables, producing continental cyclical fluctuations and, in two episodes, destabilizing nominal exchange rate effects. Policy implications are discussed. Copyright © 2005 John Wiley & Sons, Ltd.