Description

External headwinds, together with domestic vulnerabilities, have loomed over the prospects of
 emerging markets in recent years. We propose an empirical toolbox to quantify the impact of external
 macro-financial shocks on domestic economies in parsimonious way. Our model is a Bayesian VAR
 consisting of two blocks representing home and foreign factors, which is particularly useful for small
 open economies. By exploiting the mixed-frequency nature of the model, we show how the toolbox
 can be used for “nowcasting” the output growth. The conditional forecast results illustrate that regular
 updates of external information, as well as domestic leading indicators, would significantly enhance
 the accuracy of forecasts. Moreover, the analysis of variance decompositions shows that external
 shocks are important drivers of the domestic business cycle.

More publications in this series: Working Papers

More publications by: Serhat Solmaz ; Marzie Taheri Sanjani