Global-to-UK SVAR

Macro Technical Paper No. 9

By Nikoleta Anesti, Ambrogio Cesa-Bianchi, Vania Esady, Ida Hjortsø and Simon Hong

This paper investigates how global shocks transmit to the UK economy. We build a Global-to-UK Bayesian structural vector autoregression model that identifies five global shocks using sign, ranking, and bound restrictions. We find that these shocks account for around half of the variation in UK GDP and CPI over the first year. World energy and world financial shocks are the main global drivers of UK inflation and economic activity overall, while world financial shocks explain most of the variation in fluctuations in Bank Rate. Building on the identified global shocks, we extend the analysis and investigate their transmission across a panel of advanced and emerging economies. Focusing on a common global financial shock, we find that responses are larger in more financially open economies, particularly for exchange rates and equity prices.