This section provides a short overview of some of the current research projects conducted by members of the institute.

• Government debt and economic growth: Are there any causual linkages?

  Recent empirical evidence suggests that public debt does not appear to affect economic growth, at least in countries with good institutional quality. However, causality may run the other way, with low growth causing high debt rather than the other way around. This potential endogeneity problem has so far received scant attention in the literature. This project investigates the direction of causality between debt and growth in OECD countries by utilizing various causality tests (e.g. Toda and Yamamoto test, vector autoregressions). In contrast to previous literature, other variables potentially affecting the debt-growth nexus (current account, government budget balance, real effective exchange rate, long- and short-term interest rates) is accounted for. With very few exceptions, results strongly indicate that growth causes debt rather than the other way around.

• Taylor rules in small open economies

  Monetary policy is usually modeled by means of a Taylor rule with the interest rate as the policy instrument, and with inflation and the output gap as explanatory variables. It is an open question whether Taylor rules should be augmented by the exchange rate as an explanatory variable to characterize monetary policy in small open economies. This project estimates time-varying vector autoregression models to characterize structural shifts in the monetary policy stance of various central banks. First evidence for Canada suggests that a Taylor-type rule incorporating the bilateral U.S. dollar exchange rate exchange rate is suitable to explain short-term Canadian interest rate dynamics, particularly after the Bank of Canada adopted an inflation target in the early 1990s.

• Global uncertainty: Identification, measurement, and macroeconomic implications

  The recent Great Recession has renewed interest in macroeconomic uncertainty as a potential cause and accelerator of the crisis. However, most of the existing literature is confined to the identification of uncertainty on a national level, and is thus not ideally suited to explain the global reach of the crisis. This project therefore aims to identify and measure global macroeconomic uncertainty. This is achieved by utilizing dynamic factor models to decompose time series on output and inflation into global and national components. The time-varying conditional variances of these components, identified by means of either GARCH-in-mean or stochastic volatility models, are then used as global and national measures of macroeconomic uncertainty. Apart from relating these uncertainty measures to various historic macroeconomic policy episodes, the project also strives to gain insights into the origins, transmission channels and impact of global macroeconomic uncertainty on the macroeconomy.

• Exogenous shocks in South America: Macroeconomic transmission and cross-country symmetries

  The small and open economies of South America are often seen as especially dependent on US monetary policy or global commodity price movements. This project investigates the macroeconomic impact of such shocks by utilizing time series model that specifically incorporate the exogeneity assumption from the point of view of South America (block-exogenous vector autoregressions, dynamic factor models). In contrast to the previous empirical literature, the analysis focuses on the recent flexible exchange rate experience of most countries. The results indicate that the importance of exogenous shocks has been reduced during this time period. Attention is also given to the symmetry of shock reactions across the continent, which allows insights into the feasibility of a future monetary union. On that score, reactions are still too asymmetric to speak of an optimal currency area in the sense of Mundell.