Global Economy, Sovereign Spreads and Public Debt in the Euro Area: a GVAR Approach

This paper investigates international macroeconomic and financial linkages through the estimation of a GVAR model on quarterly data for 20 countries/regions, with a particular focus on 11 Euro Area member countries. We impose theoretical cointegrating restrictions on every country-specific VECX* model and introduce a long-run relation between the Euro Area sovereign spreads and the debt-to-GDP ratio differentials with respect to Germany. Besides impulse response analysis, a calibration procedure is presented, which aims at aligning the forecasts to a set of target values, while preserving the dynamic properties of the estimated GVAR, and imposes constraints on the permanent components determining the convergence values of the variables.