The GVAR Approach and the Dominance of the U.S. Economy

Abstract

This paper extends the recent literature about global macroeconomic modelling by allowing the presence of a globally dominant economy.Our contribution is both theoretical and empirical.From a theoretical standpoint, we follow Chudik and Pesaran (2011 and2012) to derive the GVAR approach as an approximation to two Infinite-Dimensional VAR (IVAR) models featuring nonstationary variables: one corresponding to the world consisting of several small open economies (benchmark model), and one corresponding to the world featuring a dominant economy (extended model).It is established that in the presence of a dominant economy, restrictions implied by the asymptotic analysis of a system without a dominant economy are no longer valid.The theoretical framework is then brought to the data by estimating both versions of the GVAR model featuring 33 countries for the period 1979(Q2)-2003(Q4).We found some support for the extended version of the GVAR model, allowing the US to be the dominant player in the world economy.