MODELLING LARGE OPEN ECONOMIES WITH INTERNATIONAL LINKAGES: THE USA AND EURO AREA

Mardi H. Dungey · Denise R. Osborn

35 citations0/0 files storedJournal of Applied Econometrics

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Market Dynamics and Volatility

Abstract

SUMMARY Empirical modelling of the linkages between the euro area and the USA requires an open economy framework. The methodology proposed in this paper achieves identification of a structural vector error correction model by supplementing restrictions from economic theory with assumptions for the direction of causality in cross‐country contemporaneous relationships. Our baseline model assumes contemporaneous causality runs from the USA to the euro area for both output and inflation, with monetary policy domestically focused. The role of the USA as leading the euro area business cycle is reinforced by our results, but strong bidirectional cross‐country interactions are uncovered for inflation and interest rates. Copyright © 2013 John Wiley & Sons, Ltd.

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References

2003An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area 1999Numerical distribution functions of likelihood ratio tests for cointegration 2002Monetary Policy and Exchange Rate Volatility in a Small Open Economy 2007Exploring the international linkages of the euro area: a global VAR analysis 1997Identifying monetary policy in a small open economy under flexible exchange rates 2003An Area Wide Model (Awm) for the Euro Area 2005Understanding the Evolution of World Business Cycles 2005Monetary Policy in a Low Pass-Through Environment

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