Cross-Country Linkages in Europe: A Global VAR Analysis
IMF Working Papers, September 11, 2013
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Bibliographic details
- Authors: Yan M Sun, Frigyes F Heinz, Giang Ho
- Published: September 11, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484345474.001
Summary
- Paper uses the Global VAR (GVAR) model proposed by Pesaran et al. (2004) to study cross-country linkages among euro area countries, other advanced European countries (including the Nordics, the UK, etc.), and the Central, Eastern and Southeastern European (CESEE) countries.
- Innovative feature: use of combined trade and financial weights (based on BIS reporting banks’ external position data) to capture the very close trade and financial ties of the CESEE countries with the advanced Europe countries.
- Main result highlights:
- Strong co-movements in output growth and interest rates within Europe.
- Weaker linkages between inflation and real credit growth within Europe.
- Euro area is the dominant source of economic influences.
- Notable subregional linkages, e.g., between the Nordic and the Baltic countries.
- Small but notable impact of CESEE countries on the rest of Europe.
Methodology
- Model framework: Global VAR (GVAR) following Pesaran et al. (2004).
- Weighting innovation: combined trade and financial weights derived from BIS reporting banks’ external position data to reflect both trade and financial ties.
Key Findings
- Cross-country co-movements:
- Output growth: strong co-movements across European countries.
- Interest rates: strong co-movements across European countries.
- Inflation: weaker linkages across Europe.
- Real credit growth: weaker linkages across Europe.
- Regional roles and spillovers:
- The euro area serves as the dominant source of economic influences in the sample.
- Subregional linkages exist, notably between Nordic and Baltic countries.
- CESEE countries exert a small but notable impact on the rest of Europe.
Policy-relevant implications
- Monitoring macro-financial linkages across Europe should emphasize:
- Transmission channels for output growth and interest rates given their strong co-movements.
- Differences in transmission for inflation and real credit growth where linkages are weaker.
- Consideration of combined trade and financial exposure measures (as used in the paper) for assessing vulnerability and spillover risk, especially for CESEE economies tightly connected to advanced Europe through banking channels.
Authors and publication note
- Authors: Yan M Sun, Frigyes F Heinz, Giang Ho
- Date: September 11, 2013
- Series: IMF Working Papers
Source: Cross-Country Linkages in Europe: A Global VAR Analysis (IMF Working Paper).