Together in bad times:connectedness and spillovers in recession and boom

Miescu, Mirela (2019) Together in bad times:connectedness and spillovers in recession and boom. Manchester School, 87 (3). pp. 342-366. ISSN 1463-6786

Abstract

Is connectedness across countries dependent on the state of the economy? We answer this question by applying the Diebold‐Yilmaz index in a non‐linear framework. Via a Threshold VAR model, we measure the connectedness of industrial production, inflation and financial variables for seven advanced economies. We find that global connectedness is sizable and business cycle dependent. Specifically, our results suggest that higher values are recorded during recessions. Financial and nominal connectedness display different dynamics relative to the connectedness in industrial production. We also show that negative shocks cause a bigger increase in global connectedness compared to their positive counterparts. In addition, while Europe appears to be vulnerable to shocks originated in USA and Japan, the US is unaffected by shocks occurring elsewhere. Results are robust to an alternative state‐dependent modelling of the parameters and our model fit outperforms both the linear VAR and the Smooth Transition VAR.