Kiel Working Papers, Kiel Institute for World Economics
No 1668:
The Effects of External Shocks on Business Cycles in Emerging Asia: A Bayesian VAR approach
Johannes Utlaut and Björn van Roye
Abstract: In this paper we analyze the effects of external shocks on
countries in Emerging Asia. For that purpose, we estimate a Bayesian Vector
Auto-Regressive model (BVAR) with an informative prior on the steady state,
including variables representing world economic activity, financial
conditions, Chinese GDP and an aggregate GDP index of eight East Asian
countries. We show that almost half of the forecast error variance of
Emerging Asia's real GDP growth can be explained by external factors. We
also conduct an estimation of a classical VAR using maximum likelihood
estimation and a traditional BVAR. An out-of-sample forecast evaluation
shows that the BVAR with an informative prior on the steady-state
outperforms both, the classical VAR and the traditional BVAR. Finally, we
simulate a double dip scenario for the world economy and a muted growth
path of the Chinese economy using conditional forecasts and show that the
economic outlook in Emerging Asia highly depends on the growth path of the
world economy and remarkably little on business cycle fluctuations in
China
Keywords: Bayesian Vector-Autoregression, Structural Vector-Autoregression, External Shocks, Emerging Markets; (follow links to similar papers)
JEL-Codes: F37,; F43; (follow links to similar papers)
23 pages, December 2010
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