Foreign Entanglements: Estimating the Source and Size of Spillovers Across Industrial Countries

IMF Working Papers, July 1, 2007

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Uses VARs of real growth since 1970 to estimate spillovers across regions.
Regions analyzed: the U.S., euro area, Japan, and an aggregate of small industrial countries (proxying for global shocks).
Calculates standard errors of impulse-response functions, explicitly incorporating uncertainty over the proper Cholesky ordering.
Extensions include adding:
- real net exports,
- commodity prices,
- financial variables.

U.S. shocks generate significant spillovers to other industrial countries.
Global shocks (proxied by the aggregate of small industrial countries) generate significant spillovers.
Shocks originating in the euro area and Japan produce small spillovers relative to the U.S. and global shocks.
Extensions show that financial effects dominate spillovers when financial variables are included.
Subperiod analysis highlights the role of the great moderation in U.S. output fluctuations and associated financial stability in lowering output volatility in other countries.

Financial stability in the U.S. has substantial implications for output volatility abroad; policies promoting U.S. financial stability can reduce international volatility.
Monitoring global (aggregate small-industrial-country) shocks is important given their significant cross-border spillovers.
The relatively smaller spillovers from the euro area and Japan suggest heterogeneity in transmission channels; policy coordination efforts should account for asymmetric external influence.

_wp07182 - Decomposition of Responses to Rest of World GDP Shocks
- _wp07182 - Decomposition of Responses to Rest of World GDP Shocks (Markdown version)
- _wp07182 - Decomposition of Responses to Rest of World GDP Shocks (PDF)