System estimation of GVAR with two dominants and network theory: Evidence for BRICs

The dynamics of traditional economic structures changed dramatically in the US and globally after 2006. In this context, the need for modeling complex macroeconomic interactions, has led us to develop an upgraded compact global (macro) econometric GVAR model, which is capable of incorporating both the complex interdependencies that exist between the various economic entities and the fact that in the global economy more than one of these entities could have a predominant role, without neglecting the channels of trade and finance. Additionally, based on the trade weight matrix that lies in the core of the GVAR framework, we provide both an analytical procedure and an ex-post econometric criterion for the selection of dominant entities. We demonstrate the dynamics of our model by focusing on the impact of a potential slowdown in the BRICs on the US and EU17 economies. According to our findings, the dominant economies are those of the USA and EU17, while the results suggest that EU17 is more vulnerable than the USA to shocks from the BRICs, implying that a potential slowdown in the BRICs will primarily affect the EU17 economy. Clearly, the proposed model can be easily used for analyzing a number of transmission mechanisms, contagion effects and network interdependencies in various settings.