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ABSTRACTStudying exchange rate pass‐through in Turkey for the period of 2006m1‐2015m6, we first show that the commonly used recursive VAR model generates unrealistic dynamics like effects of domestic variables on external variables in small open economies and biased estimates. Bias comes from unrealistic decline in energy prices in response to depreciation of currency. However, a more realistic structural VAR model suitable for small open economies generates more sensible dynamics and suggests a higher pass‐through than the recursive VAR model. Overall, our analysis demonstrates the importance of using a more realistic model setup and checking the relationships across variables when estimating ERPT in small open economies.

Uzimajući u obzir specifičnosti makedonskog gospodarstva, kao malog otvorenog gospodarstva s fiksnim tečajem, cilj ovog istraživanja je dati doprinos raspravi o tome jesu li zemlje s takvim karakteristikama pod dominacijom monetarnog ili fiskalnog režima i da li se dominacija tijekom vremena promijenila i zašto. Koristi se rekurzivni VAR model kako bi se utvrdilo jesu li proračunska salda u Makedoniji postavljena egzogeno i neovisno od obveza u javnom sektoru u razdoblju 2000. – 2011. Rezultati pokazuju da ciklički prilagođen saldo središnje vlade bitno ne reagira na promjene javnog duga. Tako je osnovni zaključak da se u analiziranom razdoblju malo pozornosti posvećuje razini javnih obveza (javnog duga) u postavljanju diskrecijske fiskalne politike, što pokazuje da fiskalna politika može potkopati cilj monetarne politike, te da dominira nad monetarnom politikom. ; Тaking into account the specific features of the Macedonian economy, as a small, open economy with a fixed exchange rate, the goal of this research is to contribute to the discussion of whether countries with such characteristics are under monetary or fiscal dominant regime and whether the dominance has changed over time and why. We use a recursive VAR model to determine whether budget balances in Macedonia were set exogenously and independently from public sector liabilities in the period 2000 – 2011. The results show that the cyclically adjusted balance of central government does not significantly respond to the public debt changes. Thus the basic conclusion is that in the analyzed period, a little attention is paid to the level od public liabilities (public debt) in setting current discretionary fiscal policy, indicating that fiscal policy can undermine the goal of monetary policy and that it dominates over monetary policy.

AbstractWe study the dynamics of U.S. inflation persistence and the sources resulting to it over the "Great Inflation" and "Great Moderation" periods. It is different from most of the current studies in that we consider a Bayesian VAR model with the DSGE prior, the so‐called DSGE‐VAR approach, in which the prior economic information is coming from a small‐scale New Keynesian DSGE model. In the recursive estimation of the model, we find a decline in the inflation persistence, measured by the "half‐life" response of inflation to the monetary policy shock, in the early 1980s. The stance of monetary policy, particularly the aggressive attitude toward the monetary policy implementation, plays an important role in explaining the structural change of the inflation persistence.

We analyze several identification frameworks based on operating procedures to measure monetary policy in a small open economy. We use a two-stage non-recursive VAR model to identify monetary shocks. We construct then various overall monetary policy indicators based on different residuals treatments and report them as weighted sums of monetary policy variables. Finally, our model is applied to the Swiss National Bank. Our main indicator reveals that the exchange rate was the dominant variable at the end of the seventies. During the eighties, aggregates had their golden age, while in the nineties, the call rate showed up as operating variable.

Recent structural VAR studies of the monetary transmission mechanism have voiced concerns about the use of recursive identification schemes based on short-run exclusion restrictions. We trace out the effects on impulse propagation of informational constraints embodying classical Cholesky-timing restrictions in otherwise standard Dynamic New Keynesian (DNK) models. By reinforcing internal propagation mechanisms and enlarging a model's equilibrium state space, timing restrictions may produce a non-trivial moving average component of the equilibrium representation, making finite order VARs a poor approximation of true adjustment paths to monetary impulses, albeit correctly identified. They can even serve as an independent source of model-based nonfundamentalness, thereby hampering shock identification via VAR methods. This notwithstanding, restricted DNK models are shown to feature (i) invertible equilibrium representations for the observables and (ii) fast-converging VAR coefficient matrices under empirically tenable parameterizations. This alleviates concerns about identification and lag truncation bias: low-order Cholesky-VARs do well at uncovering the transmission of monetary impulses in a truly Cholesky world.

Purpose– This study aims to investigate the inter-relatedness and the dynamics of banking stability measures and offers answers for some of the related issues such as does financial stability require the soundness of banking institutions, the stability of markets, the absence of turbulence and low volatility? and to what extent the soundness of banking sector in the case of emerging economies can help financial system stability.Design/methodology/approach– This study investigates banking stability by structuring a recursive micro panel vector auto regressive (VAR) model and corroborates the significance of the interrelatedness of the bank-specific variables such as liquidity, asset quality, capital adequacy and profitability by employing a robust panel data drawn from 56 leading banks for a period of 12 years.Findings– A significant contribution of this study is in establishing that liquidity in the banking-dominated financial system is reciprocally related with asset quality, capital adequacy, and profitability of the banking system and in effectively forecasting banking stability employing micro panel recursive VAR model.Research limitations/implications– The study could be further broadened by employing a macro and structural VAR modelling to forecast banking stability.Practical implications– This paper is one among the evolving body of literature that underscores the significant relationship between banking system resilience and financial stability in the context of emerging economies dominated with banking systems. Further, the forecast model is able to capture the dynamics of banking stability with greater and appreciable accuracy.Originality/value– The uniqueness of the study is in modelling banking stability measures in the context of banking-dominated emerging economy financial systems by employing micro panel recursive VAR model by deriving data from 58 leading banks for the period of 12 years from 1996 to 2009 and in offering insights in understanding financial stability with comprehensive literature review.

AbstractThe aim of this article is to investigate the dynamic effects of monetary policy shocks on economic activity and aggregate price levels across Mexican states. To do this, a recursive structural panel VAR model is implemented as proposed by Pedroni which allows for regional heterogeneity and structural identifying restrictions of common monetary policy shocks. Empirical evidence suggests a common monetary policy shock to short‐term interest rates induces significant cross‐state variation in prices and output level responses. Additional analysis indicates that structural features, such as the industry mix and the small versus large firm mix, are possible sources of the observed cross‐state variation influenced by interest rates and credit channels. We conclude that the observed differentiated regional impacts are sufficiently important to justify rethinking Mexico's current monetary policy framework in order to explicitly consider a regional view.

Abstract.  We employ the identification scheme of Kahn, Kandel and Sarig (2002) to analyse the impact of Canadian monetary policy on ex ante real interest rates and inflationary expectations. First, we decompose nominal interest rates into ex ante real rates and inflationary expectations using the methodology of Blanchard and Quah (1989). Then we estimate a recursive VAR model with innovations in a monetary aggregate and the overnight target interest rate as alternative measures of monetary policy shocks. We find that a negative policy shock raises both nominal and ex ante real interest rates, lowers inflationary expectations and real industrial output, and appreciates the Canadian dollar.

PurposeThe purpose of this paper is to analyze the effects of corruption on economic growth, human development and natural resources in Latin American and Nordic countries.Design/methodology/approachUsing the hierarchical prior of Gelman et al. (2003), a Bayesian panel Vector AutoRegression (VAR) model is estimated. In addition, two alternative approaches are considered, namely, a panel error correction VAR model and an asymmetric panel VAR model.FindingsThe results reveal some relevant contrasts: (1) in Latin America there is support for the sand the wheels hypothesis in Bolivia and Chile, support for the grease the wheels hypothesis in Colombia and no significant impact of corruption on growth in Brazil and Peru, while in Nordic countries the response of growth to shocks in corruption is negative in all cases; (2) corruption negatively affects human development in all countries from both regions; (3) corruption tends to spur natural resources sector in Latin American countries, while it is detrimental for natural resources sector in Nordic countries.Research limitations/implicationsThe panel VAR approach uses recursive scheme identification. The authors have analyzed robustness using alternative ordering of the variables. The authors also have followed two alternatives suggested by the Referee: a panel error correction VAR model and a panel asymmetric VAR model. However, another more sophisticated identification scheme could be used. Also other variables could be introduced in the VAR model.Practical implicationsRegardless of the issue of the "grease" vs the "sand the wheels" debate, corruption should be reduced because it is anyway harmful for human development. The differences in the results for Latin American and Nordic countries show that the effects of corruption have to be assessed considering the different institutional and economic conditions of the countries analyzed.Social implicationsGovernments should seek to reduce corruption because, despite corruption can have mixed effects on economic growth in some contexts, it is anyway harmful for human development. Besides, the finding that in some Latin American countries more activity in the extractive industries is generated by means of corruption confirm the association between corruption and extractivism found by Gudynas (2017) and can explain why there are issues of environmental damage and social conflict linked to natural resources in those countries.Originality/valueThe present study contributes to the literature by presenting evidence on the effects of corruption on growth, human development and natural resources sector in Latin American and Nordic countries. It is the first study on economics of corruption which directly compares Latin American and Nordic countries. This is relevant because there are important differences between both regions since Latin American countries tend to suffer from widespread corruption, while the Nordic ones have a high level of transparency. It is also the first in using a Bayesian panel VAR approach in order to evaluate the effects of corruption.