The GVAR explicitly aims to capture international economic linkages, especially linkages between the macroeconomic and financial sides of economies.
Using those tests, Ericsson (2012) then evaluates the equations for the United States, the euro area, the United Kingdom, and China in DdPS's GVAR.
The next section describes a prototypical GVAR and, in the context of that prototypical GVAR, summarizes the current approach taken to modeling GVARs, as developed in Pesaran et al.
To motivate the use of GVARs in practice, this section describes a prototypical GVAR and relates it to the GVAR in DdPS.
This subsection describes a prototypical GVAR that has three countries, with two variables per country and a single lag on each variable in the underlying vector autoregression (VAR).
In error correction representation, the prototypical GVAR in (1) is:
The explicit country-by-country structure of the GVAR in Eq.
To further illuminate the structure of the GVAR, suppose that [x.
The GVAR itself is thus a vector error correction model in which the individual conditional error correction models for all of the countries are stacked, one on top of the other.
Yet more (and more complicated) long-run relationships may exist in multivariate settings such as the GVAR in DdPS, described below.
While the prototypical GVAR in (4) has a remarkable simplicity of structure, it still shows how domestic and foreign variables may influence each other through multiple channels, and in both the short run and the long run.
To provide a sense of the empirical aspects involved in modeling a global vector autoregression, consider the GVAR in DdPS.