Macroeconomic dynamics and Panel VAR -Analysis in Developing Countries

Abstract

This study applied the Panel Vector Autoregressive Model (PVAR) to examine the macroeconomic dynamics impact of variables. PVAR examined the results by taking the Data from seven Developing countries; Indonesia, Mexico, Chile, Denmark, China, Israel, and India. Based on this study, five variables are included to run the Panel VAR i.e., Inflation, short-term interest rate, RGDP, Official reserves, and exchange rate Volatility. Developing countries faced lots of difficulties thus examining which variable reflects a high effect to improve countries’ infrastructure. Therefore, this study performs the Panel VAR, Variance decomposition, and Impulse response thus stating that inflation and short-term interest have a high impact on developing countries, whereas, RGDP and official reserves have a low impact, resultantly the volatility rate fluctuating highly when little change in inflation and interest rate occurs. Additionally, monetary policy, foreign transactions, and economic growth are also included in this paper. Because inflation relates to the monetary policy, short-term interest rate relates to investors’ opportunity, RGDP relates the economic growth, and official reserves reflect foreign transactions or support.