Measuring the Connectedness of the Global Economy

We develop a technique to evaluate macroeconomic connectedness in any multi-country macroeconomic model with an approximate VAR representation. We apply our technique to a large Global VAR covering 25 countries and derive vivid representations of the connectedness of the system. We show that the US, the Eurozone and the crude oil market exert a dominant influence in the global economy and that the Chinese and Brazilian economies are also globally significant. Recursive analysis over the period of the global financial crisis shows that shocks to global equity markets are rapidly and forcefully transmitted to real trade flows and real GDP.