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Measuring the Connectedness of the Global Economy

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JournalInternational journal of forecasting
DateAccepted/In press - 10 Oct 2020
Number of pages37
Original languageEnglish

Abstract

We develop a technique to exploit forecast error variance decompositions to evaluate the macroeconomic connectedness embedded in any multi-country macroeconomic model with an approximate vector autoregressive (VAR) representation. We apply our technique to a large global VAR model covering 25 countries and derive vivid representations of macroeconomic connectedness. We find that the US exerts a dominant influence in the global economy and
that Brazil, China and the Eurozone are also globally significant. Recursive analysis over the period of the global financial crisis shows that shocks to global equity markets are rapidly and forcefully transmitted to real trade flows and real GDP.

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    Research areas

  • Generalised Connectedness Measures (GCMs), international linkages, network analysis, macroeconomic connectedness, forecast error variance decomposition

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