Abstract
This paper presents a quarterly global model combining individual country vector errorโcorrecting models in which the domestic variables are related to the countryโspecific foreign variables. The global VAR (GVAR) model is estimated for 26 countries, the euro area being treated as a single economy, over the period 1979โ2003. It advances research in this area in a number of directions. In particular, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. Using average pairโwise crossโsection error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international coโmovements of business cycles. It develops a sieve bootstrap procedure for simulation of the GVAR as a whole, which is then used in testing the structural stability of the parameters, and for establishing bootstrap confidence bounds for the impulse responses. Finally, in addition to generalized impulse responses, the current paper considers the use of the GVAR for โstructuralโ impulse response analysis with focus on external shocks for the euro area economy, particularly in response to shocks to the US. Copyright ยฉ 2007 John Wiley & Sons, Ltd.