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External headwinds, together with domestic vulnerabilities, have loomed over the prospects of emerging markets in recent years. We propose an empirical toolbox to quantify the impact of external macro-financial shocks on domestic economies in parsimonious way. Our model is a Bayesian VAR consisting of two blocks representing home and foreign factors, which is particularly useful for small open economies. By exploiting the mixed-frequency nature of the model, we show how the toolbox can be used for “nowcasting” the output growth. The conditional forecast results illustrate that regular updates of external information, as well as domestic leading indicators, would significantly enhance the accuracy of forecasts. Moreover, the analysis of variance decompositions shows that external shocks are important drivers of the domestic business cycle.

Debts, External --- Economic development --- Bayesian statistical decision theory. --- Bayes' solution --- Bayesian analysis --- Statistical decision --- Development, Economic --- Economic growth --- Growth, Economic --- Economic policy --- Economics --- Statics and dynamics (Social sciences) --- Development economics --- Resource curse --- Debts, Foreign --- Debts, International --- External debts --- Foreign debts --- International debts --- Debt --- International finance --- Investments, Foreign --- Econometric models. --- Macroeconomics --- Industries: General --- Forecasting --- Bayesian Analysis: General --- Forecasting and Other Model Applications --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Macroeconomics: Production --- Energy: Demand and Supply --- Prices --- Economic Forecasting --- Cyclical indicators --- Production growth --- Industrial production --- Business cycles --- Oil prices --- Economic forecasting --- Production --- Economic theory --- Industries --- United States

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This paper discusses comovement between inflation and output in the euro area. The strength of the comovement may not be apparent at first sight, but is clear at business cycle frequencies. Our results suggest that at business cycle frequency, the output and core inflation comovement is high and stable, and that inflation lags the cycle in output with roughly half of its variance. The strong relationship of output and inflation hints at the importance of demand shocks for the euro area business cycle.

Eurozone. --- Inflation (Finance) --- Finance --- Natural rate of unemployment --- Euro area --- Euro zone --- Monetary unions --- Inflation --- Macroeconomics --- Money and Monetary Policy --- Econometric and Statistical Methods: General --- Business Fluctuations --- Cycles --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Price Level --- Deflation --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Monetary Policy --- Economic growth --- Monetary economics --- Business cycles --- Inflation targeting --- Consumer price indexes --- Prices --- Monetary policy --- Price indexes --- United States