A Multi-Country BVAR Model for the External Sector

Abstract

This paper describes a multi-country BVAR model developed and used by the Monetary Policy Department of the Bank of Russia. The model makes it possible to build coordinated scenario forecasts for the main macro-variables of the USA, the euro area, and China. The simultaneous modelling for the three economies makes it possible to take into account multi-country interactions of the variables and, thus, improve the predictive performance of the model compared to VAR analogues intended for individual countries. The model is based on the deviations of the variables from their potential values, which enhances GDP growth forecasts compared to a non-detrended design. A wide range of macroeconomic and financial indicators in the model makes the forecast of overall inflation more accurate against simpler benchmarks.