MODELLING LARGE OPEN ECONOMIES WITH INTERNATIONAL LINKAGES: THE USA AND EURO AREA
Article first published online: 18 APR 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 29, Issue 3, pages 377–393, April/May 2014
How to Cite
Dungey, M. and Osborn, D. R. (2014), MODELLING LARGE OPEN ECONOMIES WITH INTERNATIONAL LINKAGES: THE USA AND EURO AREA. J. Appl. Econ., 29: 377–393. doi: 10.1002/jae.2323
- Issue published online: 2 APR 2014
- Article first published online: 18 APR 2013
- Manuscript Revised: 19 NOV 2012
- Manuscript Received: 13 OCT 2010
- ARC Linkage. Grant Number: LX0561266
Empirical modelling of the linkages between the euro area and the USA requires an open economy framework. The methodology proposed in this paper achieves identification of a structural vector error correction model by supplementing restrictions from economic theory with assumptions for the direction of causality in cross-country contemporaneous relationships. Our baseline model assumes contemporaneous causality runs from the USA to the euro area for both output and inflation, with monetary policy domestically focused. The role of the USA as leading the euro area business cycle is reinforced by our results, but strong bidirectional cross-country interactions are uncovered for inflation and interest rates. Copyright © 2013 John Wiley & Sons, Ltd.