Working Paper: NBER ID: w8600
Authors: Tilak Abeysinghe; Kristin Forbes
Abstract: This paper develops a structural VAR model to measure how a shock to one country can affect the GDP of other countries. It uses trade linkages to estimate the multiplier effects of a shock as it is transmitted through other countries' output fluctuations. The paper introduces a new specification strategy that significantly reduces the number of unknowns and allows cross-country relationships to vary over time. Then it uses this model to examine the impact of shocks to 11 Asian countries, the U.S. and the rest of the OECD. The model produces reasonably good short-term forecasts. Impulse-response matrices suggest that these multiplier effects are large and significant and can transmit shocks in very different patterns than predicted from a bilateral-trade matrix. For example, due to these output-multiplier effects, a shock to one country can have a large impact on countries that are relatively minor bilateral trading partners.
Keywords: No keywords provided
JEL Codes: C32; C50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bilateral trade flows (F10) | A country's vulnerability to crises originating from trading partners (F65) |
| Shocks to one country (F41) | Substantial indirect multiplier effects on output growth of other countries (F69) |
| Output growth in one country (O57) | Output growth in multiple other countries (O57) |