Economic growth and exports: a GVAR approach

Abstract

The north-south divide of the European economies has been the subject of debate. Motivated by the global trade imbalances and their impact under the EMU framework, we employ a Global Vector Auto-Regressive (GVAR) model for 28 developed and developing countries in order to assess the propagation mechanisms of real trade and macroeconomic shocks, focusing on the interconnections among the North Euro Area (NEA) and the South Euro Area (SEA). We incorporate theory-based long-run restrictions and examine various scenarios such: non-export real output shocks, expansionary shocks and real exchange rate shocks. The results provide support for a symmetric adjustment in the Euro area; an expansionary policy of the NEA and increased competitiveness in the SEA should establish a common framework to encounter trade imbalances of the debtor Euro area economies. We show that NEA and U.S. origin shocks to domestic output exert a dominant influence in the rest of the Europe and Asia while the strong linkage between trade flows within the Euro area is confirmed.