How External Factors Affect Domestic Economy: Nowcasting an Emerging Market

December 23, 2015

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Format: Chicago

Serhat Solmaz, and Marzie Taheri Sanjani. How External Factors Affect Domestic Economy: Nowcasting an Emerging Market, (USA: International Monetary Fund, 2015) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

External headwinds, together with domestic vulnerabilities, have loomed over the prospects of emerging markets in recent years. We propose an empirical toolbox to quantify the impact of external macro-financial shocks on domestic economies in parsimonious way. Our model is a Bayesian VAR consisting of two blocks representing home and foreign factors, which is particularly useful for small open economies. By exploiting the mixed-frequency nature of the model, we show how the toolbox can be used for “nowcasting” the output growth. The conditional forecast results illustrate that regular updates of external information, as well as domestic leading indicators, would significantly enhance the accuracy of forecasts. Moreover, the analysis of variance decompositions shows that external shocks are important drivers of the domestic business cycle.

Subject: Business cycles, Cyclical indicators, Economic forecasting, Economic growth, Industrial production, Oil prices, Production, Production growth

Keywords: Aggregated external shocks, Bayesian estimation, Business cycles, Counterfactual economy, Cyclical indicators, Economy block, Economy interest rates, Emerging Market, GDP dynamic, Global, Home economy, Industrial production, Nowcasting, Open economy, Production growth, Simulated economy, VAR, WP

Publication Details

Pages:

23
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/269
Stock No:

WPIEA2015269
ISBN:

9781513598987
ISSN:

1018-5941

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