International macroeconomic vulnerability

We propose and implement an index of macroeconomic vulnerability to foreign shocks based on a structural time-varying bayesianVARwith a block-exogeneity hypothesis for a given pair of a large economy and a small open economy. The index is based on the sum of the responses of the small open economy to shocks in the large economy over time, thus allowing us to disentangle and measure the source of the shock, impact variables and duration of impact. Our approach brings light not only to vulnerability across countries and over time, but it can be also be used to elucidate previously unanswered channels. We provide an application of this approach to a global banks framework, allowing us to measure some yet unmeasured theoretical mechanisms. Using a sample of developed and developing countries, we find that global banks do not increase the macroeconomic vulnerability of a country.