Back Matter

Appendix A. Description of the Data Set

Estimation is based on quarterly data on a variety of macroeconomic and financial market variables observed for forty economies over the sample period 1999Q1 through 2013Q4. The economies under consideration are Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, the Czech Republic, Denmark, Finland, France, Germany, Greece, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Russia, Saudi Arabia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, the United Kingdom, and the United States. Where available, this data was obtained from the GDS and WEO databases compiled by the International Monetary Fund. Otherwise, it was extracted from the IFS database produced by the International Monetary Fund.

The macroeconomic variables under consideration are the price of output, the price of consumption, the quantity of output, the quantity of private consumption, the quantity of exports, the quantity of imports, the nominal wage, the unemployment rate, employment, the quantity of public domestic demand, the fiscal balance ratio, and the prices of nonrenewable energy and nonenergy commodities. The price of output is measured by the seasonally adjusted gross domestic product price deflator, while the price of consumption is proxied by the seasonally adjusted consumer price index. The quantity of output is measured by seasonally adjusted real gross domestic product, while the quantity of private consumption is measured by seasonally adjusted real private consumption expenditures. The quantity of exports is measured by seasonally adjusted real export revenues, while the quantity of imports is measured by seasonally adjusted real import expenditures. The nominal wage is derived from the quadratically interpolated annual labor income share, while the unemployment rate is measured by the seasonally adjusted share of total unemployment in the total labor force, and employment is measured by quadratically interpolated annual total employment. The quantity of public domestic demand is measured by the sum of quadratically interpolated annual real consumption and investment expenditures of the general government, while the fiscal balance is measured by the quadratically interpolated annual overall fiscal balance of the general government. The prices of energy and nonenergy commodities are proxied by broad commodity price indexes denominated in United States dollars.

The financial market variables under consideration are the nominal policy interest rate, the short term nominal market interest rate, the long term nominal market interest rate, the price of equity, and the nominal bilateral exchange rate. The nominal policy interest rate is measured by the central bank discount rate, while the short term nominal market interest rate is measured by a three month money market rate, and the long term nominal market interest rate is measured by the ten year government bond yield. The price of equity is proxied by a broad stock price index denominated in domestic currency units, while the nominal bilateral exchange rate is measured by the domestic currency price of one United States dollar. All of these financial market variables are expressed as a period average.

Calibration is based on annual data obtained from databases compiled by the International Monetary Fund where available, and from the Bank for International Settlements or the World Bank Group otherwise. Macroeconomic great ratios are derived from the WEO and WDI databases, while financial great ratios are also derived from the IFS and BIS databases. Bilateral trade weights are derived from the DOTS database. Portfolio weights are derived from the CPIS, BIS, and WDI databases.

Appendix B. Tables and Figures

Table 1.

Structural Parameter Estimation Results

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Note: All priors are normally distributed, while all posteriors are asymptotically normally distributed.
Figure 1.
Figure 1.

Impulse Responses to a Domestic Productivity Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic productivity shocks which raise output price inflation by one percentage point. Results are annualized where applicable.
Figure 2.
Figure 2.

Impulse Responses to a Domestic Labor Supply Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic labor supply shocks which raise the labor force by one percent. Results are annualized where applicable.
Figure 3.
Figure 3.

Impulse Responses to a Domestic Consumption Demand Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic consumption demand shocks which raise private consumption by one percent. Results are annualized where applicable.
Figure 4.
Figure 4.

Impulse Responses to a Domestic Investment Demand Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic investment demand shocks which raise private investment by one percent. Results are annualized where applicable.
Figure 5.
Figure 5.

Impulse Responses to a Domestic Monetary Policy Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic monetary policy shocks which raise the nominal policy interest rate by one percentage point. Results are annualized where applicable.
Figure 6.
Figure 6.

Impulse Responses to a Domestic Credit Risk Premium Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic credit risk premium shocks which raise the short term nominal market interest rate by one percentage point. Results are annualized where applicable.
Figure 7.
Figure 7.

Impulse Responses to a Domestic Duration Risk Premium Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic duration risk premium shocks which raise the long term nominal market interest rate by one percentage point. Results are annualized where applicable.
Figure 8.
Figure 8.

Impulse Responses to a Domestic Equity Risk Premium Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic equity risk premium shocks which raise the price of equity by ten percent. Results are annualized where applicable.
Figure 9.
Figure 9.

Impulse Responses to a Domestic Fiscal Expenditure Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic fiscal expenditure shocks which raise the primary fiscal balance ratio by one percentage point. Results are annualized where applicable.
Figure 10.
Figure 10.

Impulse Responses to a Domestic Fiscal Revenue Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to domestic fiscal revenue shocks which raise the primary fiscal balance ratio by one percentage point. Results are annualized where applicable.
Figure 11.
Figure 11.

Impulse Responses to a World Energy Commodity Price Markup Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to a world energy commodity price markup shock which raises the price of energy commodities by ten percent. Results are annualized where applicable.
Figure 12.
Figure 12.

Impulse Responses to a World Nonenergy Commodity Price Markup Shock

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the impulse responses of consumption price inflation (lhs), output (lhs), private consumption (lhs), private investment (rhs), the nominal policy interest rate (lhs), the real effective exchange rate (lhs), the unemployment rate (lhs), the fiscal balance ratio (lhs), and the current account balance ratio (lhs) to a world nonenergy commodity price markup shock which raises the price of nonenergy commodities by ten percent. Results are annualized where applicable.
Figure 13.
Figure 13.

Forecast Error Variance Decompositions of Consumption Price Inflation

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the horizon dependent forecast error variance of consumption price inflation into contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 14.
Figure 14.

Forecast Error Variance Decompositions of Output

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the horizon dependent forecast error variance of output into contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 15.
Figure 15.

Forecast Error Variance Decompositions of Private Consumption

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the horizon dependent forecast error variance of private consumption into contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 16.
Figure 16.

Forecast Error Variance Decompositions of Private Investment

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the horizon dependent forecast error variance of private investment into contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 17.
Figure 17.

Forecast Error Variance Decompositions of the Nominal Policy Interest Rate

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the horizon dependent forecast error variance of the nominal policy interest rate into contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 18.
Figure 18.

Forecast Error Variance Decompositions of the Real Effective Exchange Rate

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the horizon dependent forecast error variance of the real effective exchange rate into contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 19.
Figure 19.

Forecast Error Variance Decompositions of the Unemployment Rate

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the horizon dependent forecast error variance of the unemployment rate into contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 20.
Figure 20.

Forecast Error Variance Decompositions of the Fiscal Balance Ratio

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the horizon dependent forecast error variance of the fiscal balance ratio into contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 21.
Figure 21.

Forecast Error Variance Decompositions of the Current Account Balance Ratio

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the horizon dependent forecast error variance of the current account balance ratio into contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 22.
Figure 22.

Historical Decompositions of Consumption Price Inflation

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes observed consumption price inflation as measured by the seasonal logarithmic difference of the price of consumption into the sum of a trend component and contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 23.
Figure 23.

Historical Decompositions of Output Growth

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes observed output growth as measured by the seasonal logarithmic difference of output into the sum of a trend component and contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 24.
Figure 24.

Historical Decompositions of the Unemployment Rate

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Decomposes the observed unemployment rate into the sum of a trend component and contributions from domestic supply , foreign supply , domestic demand , foreign demand , world monetary policy , domestic fiscal policy , foreign fiscal policy , domestic risk premium , foreign risk premium , and world terms of trade shocks.
Figure 25.
Figure 25.

Simulated Conditional Betas of Output

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the betas of output with respect to contemporaneous output in systemic economies conditional on all shocks , macroeconomic shocks , and financial shocks in each of these systemic economies. These betas are calculated with a Monte Carlo simulation with 999 replications for 2T periods, discarding the first T simulated observations to eliminate dependence on initial conditions, where T denotes the observed sample size.
Figure 26.
Figure 26.

Peak Impulse Responses to Foreign Productivity Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to productivity shocks in systemic economies which raise their output price inflation by one percentage point. Results are annualized where applicable.
Figure 27.
Figure 27.

Peak Impulse Responses to Foreign Labor Supply Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to labor supply shocks in systemic economies which raise their labor force by one percent. Results are annualized where applicable.
Figure 28.
Figure 28.

Peak Impulse Responses to Foreign Consumption Demand Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to consumption demand shocks in systemic economies which raise their private consumption by one percent. Results are annualized where applicable.
Figure 29.
Figure 29.

Peak Impulse Responses to Foreign Investment Demand Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to investment demand shocks in systemic economies which raise their private investment by one percent. Results are annualized where applicable.
Figure 30.
Figure 30.

Peak Impulse Responses to Foreign Monetary Policy Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to monetary policy shocks in systemic economies which raise their nominal policy interest rate by one percentage point. Results are annualized where applicable.
Figure 31.
Figure 31.

Peak Impulse Responses to Foreign Credit Risk Premium Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to credit risk premium shocks in systemic economies which raise their short term nominal market interest rate by one percentage point. Results are annualized where applicable.
Figure 32.
Figure 32.

Peak Impulse Responses to Foreign Duration Risk Premium Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to duration risk premium shocks in systemic economies which raise their long term nominal market interest rate by one percentage point. Results are annualized where applicable.
Figure 33.
Figure 33.

Peak Impulse Responses to Foreign Equity Risk Premium Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to equity risk premium shocks in systemic economies which raise their price of equity by ten percent. Results are annualized where applicable.
Figure 34.
Figure 34.

Peak Impulse Responses to Foreign Fiscal Expenditure Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to fiscal expenditure shocks in systemic economies which raise their primary fiscal balance ratio by one percentage point. Results are annualized where applicable.
Figure 35.
Figure 35.

Peak Impulse Responses to Foreign Fiscal Revenue Shocks

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the peak impulse responses of consumption price inflation , output , the real effective exchange rate , the fiscal balance ratio , and the current account balance ratio to fiscal revenue shocks in systemic economies which raise their primary fiscal balance ratio by one percentage point. Results are annualized where applicable.
Figure 36.
Figure 36.

Forecast Performance Evaluation Statistics

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the horizon dependent logarithmic root mean squared prediction error ratio for consumption price inflation and output growth relative to a random walk, expressed in percent.
Figure 37.
Figure 37.

Sequential Unconditional Forecasts of Consumption Price Inflation

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the cyclical component of observed consumption price inflation as measured by the seasonal difference of the cyclical component of the logarithm of the price of consumption versus sequential unrestricted forecasts .
Figure 38.
Figure 38.

Sequential Unconditional Forecasts of Output Growth

Citation: IMF Working Papers 2014, 200; 10.5089/9781616355784.001.A999

Note: Depicts the cyclical component of observed output growth as measured by the seasonal difference of the cyclical component of the logarithm of output versus sequential unrestricted forecasts .

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1

The author gratefully acknowledges advice provided by Tamim Bayoumi, in addition to comments and suggestions received from seminar participants at the International Monetary Fund.

2

In steady state equilibrium Ai=νiC=νiI=υiX=υiB=υiS=νiε=1,νiip=υiis=νiG=νiT=0,νiM=θMθM1 and σθY,i2=σθM,i2=σθL,i2=σA,i2=σνC,i2=σνI,i2=σνX,i2=σνM,i2=σνi,P,i2=σνi,S,i2=σνB,i2=σνS,i2=σνε,i2=σνL,i2=σνG,i2=σνT,i2=σθY,k2=0

3

The nominal effective exchange rate lnE^i,t satisfies lnE^i,t=lnE^i,i*,tj=1Nwi,jTlnE^j,i*,t, while the real effective exchange rate lnQ^i,t satisfies lnQ^i,t=lnQ^i,i*,tj=1Nwi,jTlnQ^j,i*,t.

4

The Hessian matrix of the objective function 2S(y¯)y¯y¯=2[IT+λ(Δd)(Δd)] is positive definite throughout its domain, because α2S(y¯)y¯y¯α=2[αα+λ(Δdα)(Δdα)]>0 for any α0.

Policy and Spillover Analysis in the World Economy: A Panel Dynamic Stochastic General Equilibrium Approach
Author: Mr. Francis Vitek