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The International Impact of Financial Shocks: A Global VAR and Connectedness Measures Approach

Author

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  • Donal Smith
Abstract
This paper examines the international impact of shocks to a large array of measures of financial frictions and financial stress. The methodology employed in this paper is twofold, it firstly utilities the Global VAR (GVAR) approach and then employs a set of Generalized Connectedness Measures (GCM) to summarise the results of this analysis. These two methodologies provide a way to rank the relative importance of different measures of financial shocks on countries and macroeconomic variables. The methodologies are applied to a data set of 17 countries, over the period 1981Q1 to 2013Q1, with 12 separate measures of financial frictions and financial stress. Utilising connectedness index measures, it is found that financial stress measures constructed from the corporate bond market are the most in uential on global macroeconomic variables and that this result is also consistent across individual countries. It is found that many proposed measures of financial stress are not net transmitters of influence but are more dependent on external factors. The paper finds little evidence to support the use of credit as a financial shock variable as is common in the literature. This variable is found to be a weak transmitter of shocks and highly influenced by shocks to other variables.

Suggested Citation

  • Donal Smith, 2016. "The International Impact of Financial Shocks: A Global VAR and Connectedness Measures Approach," Discussion Papers 16/07, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:16/07
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    More about this item

    Keywords

    Financial Frictions; Financial Shocks; international linkages; macroeconomic connectedness; Generalized Connectedness Measures (GCMs); Financial Stress Indicators;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G01 - Financial Economics - - General - - - Financial Crises

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