The Impact of Global Tensions on the Economic and Financial Cycle in Romania
Keywords:financial cycle, global tensions, factor analysis, comovement, historical decomposition
In this paper I investigated the impact of global financial tensions (approximated by the common factor in the evolution of market volatility indexes in the US and the Euro area – VIX, VSTOXX, VFTSE) on the Romanian financial and economic cycle. As measures for the financial cycle I used multiple indicators following the literature on the subject (credit variables, bond yields, house prices and GDP) and I investigated the impact of global tensions on each of the selected variables and also on an aggregate measure of the financial and economic cyclical position, which I built by applying factor analysis. The influence of global tensions was studied by use of wavelet coherence, concordance indicators and historical decomposition. The results showed important correlations of global tensions with the selected variables and also with the cyclical position indicator. Moreover, the concordance indicator (computed by the use of Bry-Boschan algorithm for quarterly series on the band-pass filtered series) showed that indicators were in the same cyclical position with the global financial evolutions most of the time (the indicator varying between 54 percent and 70 percent of the time), therefore the local cyclical position (built out of the considered indicators) coincided with the cycle of global tensions in 60 percent of cases. Historical decomposition was performed in Bayesian VARs estimated for each of the variables and the global tensions indicator. The results showed a great impact, dominant at times, of global shocks on the evolution of the selected variables and on the cyclical position indicator.
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