International Macroeconomic Vulnerability (with Márcio Garcia, Diogo Guillén, and João Velloso)
Journal of International Money and Finance, Revise & Resubmit, 2023
Insper Working Paper (2022), PUC-Rio Working Paper n. 691 (2022)
We propose and implement an index of macroeconomic vulnerability to foreign shocks based on a structural time-varying Bayesian VAR with a block-exogeneity hypothesis for a given pair of a large economy and a small open economy. The index is based on the sum of the responses of the small open economy to shocks in the large economy over time, thus allowing us to disentangle and measure the source of the shock, impact variables and duration of impact. Among the many results that our index unveils, we highlight that we do not find that output shocks in the US have a different impact in other countries during periods of crises and we also find that there is a growing decouple between EM and DM on how domestic inflation is affected by US output shocks. Our approach can also be used to elucidate previously unanswered channels or unmeasured theoretical mechanisms. Using a sample of developed and developing countries, we find that global banks do not increase the macroeconomic vulnerability of a country.