DP4014 The Transmission Mechanism in a Changing World

Author(s): Michael J Artis , Ana Beatriz C Galvão , Massimiliano Marcellino

Publication Date: August 2003

Keyword(s): transmission mechanism , shocks , cycles , europe , impulse response , non-linear VAR

JEL(s): C32 , C53 , E32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4014.asp

This Paper aims at improving the understanding of the transmission of shocks across countries and how this transmission may have changed over time. By employing a model that allows for parameter changes across regimes, we show that transmission of shocks from the US to European countries may depend on the values of transition variables such as financial prices, exchange rates, international capital flows, trade links and monetary policy instruments. We also show that transmission mechanisms estimated with the proposed models have good performance in describing the 2001 downturn in some European countries as an effect of a US shock. More generally, the models have a good forecasting performance over short horizons.