Macroeconomic Forecasting and Policy in Data Rich Digital Age Environments

Event Date: 14 February 2018

Speaker: Arnab Bhattacharjee, Heriot Watt University

Time: 3:30pm

Location: Strathclyde Business School, Cathedral Wing, CW507b

Abstract

We develop an identification result based on relative variances of the idiosyncratic shocks. The analysis allows to make inferences on the structural ordering of macroeconomic variables in a vector autoregression (VAR) or a Factor-Augmented VAR (FAVAR) context. To illustrate our findings we apply the framework and methods to the study of propagation of international and UK economy wide shocks, based on an extension, initially proposed by Mumtaz and Surico (2009).  There is a the FAVAR model developed in Bernanke, Boivin, and Eliasz (2005) in to a small open economy setting. However, the structural ordering implied by the model, whereby UK macroeconomic factors trail the international economic variables, is not supported by the data. The empirical evidence rather reveals an ordering where real activity in the UK emerges at the top of the order, followed by the international economy, and finally the UK policy rate. This suggests characterisation of the UK not as a small open economy, but an (medium-sized) open economy with significant contemporaneous influences on the international economy.

Published: 5 December 2017