How External Factors Affect Domestic Economy : Nowcasting an Emerging Market

Author/Editor:

Serhat Solmaz ; Marzie Taheri Sanjani

Publication Date:

December 23, 2015

Electronic Access:

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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.

Series:

Working Paper No. 15/269

English

Publication Date:

December 23, 2015

ISBN/ISSN:

9781513598987/1018-5941

Stock No:

WPIEA2015269

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

23

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