External shocks pass-through into selected central and Eastern European countries
Abstract
The ongoing COVID-19 pandemic put further pressure on the economies, both at individual and global level and, amid already existing vulnerabilities, worsened the economic prospects. As a result of the negative effects of these tensions in tandem with global value chains disruptions, commodities’ prices increased, leading to strong inflationary pressures around the globe. Given possible permanent effects on inflation expectations, it is therefore questionable how fast those prices are to be stabilized. In this context, this paper focuses on a group of 10 European countries, namely Czechia, Hungary, Poland, Romania, France, Germany, Italy, Spain, the Netherlands and the United Kingdom, in the period spanning from 2005 to 2020. By implementing a GVAR model, the study analyses the pass-through of the external shocks stemming mainly from the Euro Area and the US to the CEE region, comparing the responses obtained for these countries with the ones of the developed economies. Considering the strong trade relationships between the analysed countries, the considered transmission channel is the commercial one. The results indicate that a supply shock in the Euro Area has a significant negative impact on the selected CEE countries’ economic growth, the offsetting factors not being strong enough to diminish the response.
First published online 11 October 2022
Keyword : global vector autoregressive (GVAR), crisis, supply shocks, CEE region, trade chains
How to Cite
Necula, C., Murarasu, B., Radu, A.-N., Anghelescu, C., & Zaharia, A. (2022). External shocks pass-through into selected central and Eastern European countries. Technological and Economic Development of Economy, 28(6), 1768–1790. https://doi.org/10.3846/tede.2022.17684
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Edwards, S., & Levy Yeyati, E. (2005). Flexible exchange rates as shock absorbers. European Economic Review, 49(8), 2079–2105. https://doi.org/10.1016/j.euroecorev.2004.07.002
El-Shagi, M., & Tochkov, K. (2022). Shadow of the colossus: Euro area spillovers and monetary policy in Central and Eastern Europe. Journal of International Money and Finance, 120(C), 102501. https://doi.org/10.1016/j.jimonfin.2021.102501
Falagiarda, M., McQuade, P., & Tirpak, M. (2015). Spillovers from the ECB’s non-standard monetary policies on non-euro area EU countries: Evidence from an event-study analysis (ECB Working Paper, 1869). https://doi.org/10.13140/RG.2.2.17327.74401
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Georgiadis, G. (2016). Determinants of global spillovers from US monetary policy. Journal of International Money and Finance, 67, 41–61. https://doi.org/10.1016/j.jimonfin.2015.06.010
Ha, J., Kose M. A., Otrok, C., & Prasad, E. S. (2020). Global macro-financial cycles and spillovers (NBER Working Paper, 26798). https://doi.org/10.3386/w26798
Huber, F., Koop, G., Onorante, L., Pfarrhofer, M., & Schreiner, J. (2021). Nowcasting in a pandemic using non-parametric mixed frequency VARs (ECB Working Paper, 2510). https://doi.org/10.2139/ssrn.3797129
Hung, N. T. (2019). An analysis of CEE equity market integration and their volatility spillover effects. European Journal of Management and Business Economics, 29(1), 23–40. https://doi.org/10.1108/EJMBE-01-2019-0007
Hung, N. T. (2020). Market integration among foreign exchange rate movements in Central and Eastern European countries. Society and Economy, 42(1), 1–20. https://doi.org/10.1556/204.2020.00001
International Monetary Fund. (2013). 2013 Spillover report (IMF Policy Papers, 058. International Monetary Fund. https://doi.org/10.5089/9781498341561.007
Jordà, Ò., Sanjay R. S., & Taylor, A. M. (2022). Longer-run economic consequences of pandemics. The Review of Economics and Statistics, 104(1), 166–175. https://doi.org/10.1162/rest_a_01042
Khan, N. (2020). Spillover effects of trade shocks in the Central and Eastern European and Baltic countries. Journal of Economic Integration, 35(1), 39–68. https://doi.org/10.11130/jei.2020.35.1.39
Kim, H. (2013). Generalized impulse response analysis: General or extreme? EconoQuantum, 10(2), 135–141. https://doi.org/10.18381/eq.v10i2.165
Koop, G., Pesaran, M. H., & Potter, S. M. (1996). Impulse response analysis in nonlinear multivariate models. Journal of Econometrics, 74(1), 119–147. https://doi.org/10.1016/0304-4076(95)01753-4
Milesi-Ferretti, G.-M., & Tille, C. (2011). The great retrenchment: International capital flows during the global financial crisis. Economic Policy, 26(66), 289–346. https://doi.org/10.1111/j.1468-0327.2011.00263.x
Miranda-Agrippino, S., & Rey, H. (2020). U.S. monetary policy and the global financial cycle. Review of Economic Studies, 87(6), 2754–2776. https://doi.org/10.1093/restud/rdaa019
Miranda-Agrippino, S., Nenova, T., & Rey, H. (2020). Global footprints of monetary policies (Discussion paper, 2004). Centre for Macroeconomics (CFM).
Moder, I. (2019). Spillovers from the ECB’s non-standard monetary policy measures on South-astern Europe. International Journal of Central Banking, 15(4), 127–163.
Mohaddes, K., & Raissi, M. (2020). Compilation, revision and updating of the Global VAR (GVAR) database, 1979Q2–2019Q4 (Working paper). University of Cambridge. https://doi.org/10.17863/CAM.56762
Passari, E., & Rey, H. (2015). Financial flows and the international monetary system. The Economic Journal, 125(584), 675–698. https://doi.org/10.1111/ecoj.12268
Pesaran, H. H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economics Letters, 58(1), 17–29. https://doi.org/10.1016/S0165-1765(97)00214-0
Pesaran, M. H., Schuermann, T., & Weiner, S. M., (2004). Modeling regional interdependencies using a global error-correcting macroeconometric model. Journal of Business & Economic Statistics, 22(2), 129–162. https://doi.org/10.1198/073500104000000019
Pesaran, M. H, Shin, Y., & Smith, R. J. (2000). Structural analysis of vector error correction models with exogenous I(1) variables. Journal of Econometrics, 97(2), 293–343. https://doi.org/10.1016/S0304-4076(99)00073-1
Pfeiffer, P., Varga, J., & Veld, J. (2021). Quantifying spillovers of next generation EU investment (European Economy Discussion Paper, 144). https://doi.org/10.2765/80561
Picek, O. (2020). Spillover effects from Next Generation EU. Intereconomics, 55, 325–331. https://doi.org/10.1007/s10272-020-0923-z
Rey, H. (2018). Dilemma not trilemma: The global financial cycle and monetary policy independence (NBER Working Paper, 21162). https://doi.org/10.3386/w21162
Rey, H., & Martin, P. (2006). Globalization and emerging markets: With or without crash? American Economic Review, 96(5), 1631–1651. https://doi.org/10.1257/aer.96.5.1631
Shin, H. S. (2014). The second phase of global liquidity and its impact on emerging economies. In K. Chung, S. Kim, H. Park, C. Choi, & H. S. Shin (Eds.), Volatile capital flows in Korea. Palgrave Macmillan. https://doi.org/10.1057/9781137368768_10
Smith, L. V., & Galesi, A. (2014). GVAR toolbox 2.0. Global VAR Modelling. https://sites.google.com/site/gvarmodelling/gvar-toolbox
Szent-Ivanyi, B., & Vigvari, G. (2012). Spillovers from foreign direct investment in Central and Eastern Europe. Society and Economy, 34(1), 51–72. https://doi.org/10.2307/41472187
Umar, M., Xua, Y., & Mirza, S. S. (2021). The impact of Covid-19 on Gig economy. Economic Research-Ekonomska Istraživanja, 34(1), 2284–2296. https://doi.org/10.1080/1331677X.2020.1862688
Wang, Q., & Han, X. (2021). Spillover effects of the United States economic slowdown induced by COVID-19 pandemic on energy, economy and environment in other countries. Environmental Research, 196, 110936. https://doi.org/10.1016/j.envres.2021.110936
Altăr, M., Ifrim, A., & Altăr-Samuel, A. (2015). Eastern Europe in the world economy: A global VAR analysis. Romanian Journal of Economic Forecasting, 18(3), 5–26.
Anaya, P., Hachula, M., & Offermanns, C. (2017). Spillovers of U.S. Unconventional monetary policy to emerging markets: The role of capital flows. Journal of International Money and Finance, 73(B), 275–295. https://doi.org/10.1016/j.jimonfin.2017.02.008
Antal, M., & Kaszab, L. (2022). Spillover effects of the European Central Bank’s expanded asset purchase program to non-eurozone countries in Central and Eastern Europe. Economic Modelling, 113, 105868. https://doi.org/10.1016/j.econmod.2022.105868
Bekaert, G., Hoerova, M., & Lo Duca, M. (2013). Risk, uncertainty and monetary policy. Journal of Monetary Economics 60(7), 771–788. https://doi.org/10.1016/j.jmoneco.2013.06.003
Belke, A., & Osowski, T. (2019). Measuring fiscal spillovers in EMU and beyond: A global VAR approach. Scottish Journal of Political Economy, 66(1), 54–93. https://doi.org/10.1111/sjpe.12172
Broda, C. (2001). Coping with terms-of-trade shocks: Pegs versus floats. American Economic Review, 91(2), 376–380. https://doi.org/10.1257/aer.91.2.376
Bruno, V., & Shin, H. S. (2015). Capital flows and the risk-taking channel of monetary policy. Journal of Monetary Economics, 71, 119–132. https://doi.org/10.1016/j.jmoneco.2014.11.011
Calvo, G. A., Izquierdo, A., & Mejıa, L.-F. (2008). Systemic sudden stops: The relevance of balance-sheet effects and financial integration (NBER Working Paper, 14026). https://doi.org/10.3386/w14026
Cavallo, A., & Ribba, A. (2018). Measuring the effects of oil price and Euro-area shocks on CEECs business cycles. Journal of Policy Modeling, 40(1), 74–96. https://doi.org/10.1016/j.jpolmod.2017.09.006
Cavallo, E. A., & Frankel, J. A. (2008). Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality. Journal of International Money and Finance, 27(8), 1430–1452. https://doi.org/10.1016/j.jimonfin.2007.10.004
Cerutti, E. M., Claessens, S., & Rose, A. K. (2017). How important is the global financial cycle? Evidence from capital flows (IMF Working Paper, WP/17/193. https://doi.org/10.5089/9781484316603.001
Chudik, A., & Pesaran, M. H. (2014). Theory and practice of GVAR modelling. Journal of Economic Surveys, 30(1), 165–197. https://doi.org/10.1111/joes.12095
Chudik, A., Mohaddes, K., & Raissi, M. (2021). COVID-19 fiscal support and its effectiveness. Economics Letters, 205(4), 109939. https://doi.org/10.1016/j.econlet.2021.109939
Cochrane, J. H. (2020). Coronavirus monetary policy. In R. Baldwin & B. W. di Mauro (Eds.), Economics in the time of COVID-19 (pp. 105–108). CEPR Press.
Davis, J. S., Valente, G., & van Wincoop, E. (2021). Global drivers of gross and net capital flows. Journal of International Economics, 128, 103397. https://doi.org/10.1016/j.jinteco.2020.103397
Dées, S., di Mauro F., Pesaran, M. H., & Smith, L. V. (2007). Exploring the international linkages of the euro area: A global VAR analysis. Journal of Applied Econometrics, 22(1), 1–38. https://doi.org/10.1002/jae.932
Demena, B., & Murshed, S. (2018). Transmission channels matter: Identifying spillovers from FDI. The Journal of International Trade & Economic Development, 27(7), 701–728. https://doi.org/10.1080/09638199.2018.1439083
Dimian, G. C., Apostu, S. A., Vasilescu, M. D., Aceleanu, M. I., & Jablonsky, J. (2021). Vulnerability and resilience in health crises. Evidence from European countries. Technological and Economic Development of Economy, 27(4), 783–810. https://doi.org/10.3846/tede.2021.14753
Edwards, S. (2007a). Capital controls, capital flow contractions, and macroeconomic vulnerability. Journal of International Money and Finance, 26(5), 814–840. https://doi.org/10.1016/j.jimonfin.2007.04.010
Edwards, S. (2007b). Capital controls, sudden stops, and current account reversals. In S. Edwards (Ed.), Capital controls and capital flows in emerging economies: Policies, practices and consequences (pp. 73–120). University of Chicago Press. https://doi.org/10.7208/chicago/9780226184999.003.0003
Edwards, S., & Levy Yeyati, E. (2005). Flexible exchange rates as shock absorbers. European Economic Review, 49(8), 2079–2105. https://doi.org/10.1016/j.euroecorev.2004.07.002
El-Shagi, M., & Tochkov, K. (2022). Shadow of the colossus: Euro area spillovers and monetary policy in Central and Eastern Europe. Journal of International Money and Finance, 120(C), 102501. https://doi.org/10.1016/j.jimonfin.2021.102501
Falagiarda, M., McQuade, P., & Tirpak, M. (2015). Spillovers from the ECB’s non-standard monetary policies on non-euro area EU countries: Evidence from an event-study analysis (ECB Working Paper, 1869). https://doi.org/10.13140/RG.2.2.17327.74401
Garcia, R., Lorenzani, D., Monteiro, D., Perticari, F., Vašíček, B., & Vogel, L. (2021). Financial spillover and contagion risks in the euro area in 2007–2019 (European Commission Discussion Paper, 137). https://doi.org/10.2765/412074
Georgiadis, G. (2016). Determinants of global spillovers from US monetary policy. Journal of International Money and Finance, 67, 41–61. https://doi.org/10.1016/j.jimonfin.2015.06.010
Ha, J., Kose M. A., Otrok, C., & Prasad, E. S. (2020). Global macro-financial cycles and spillovers (NBER Working Paper, 26798). https://doi.org/10.3386/w26798
Huber, F., Koop, G., Onorante, L., Pfarrhofer, M., & Schreiner, J. (2021). Nowcasting in a pandemic using non-parametric mixed frequency VARs (ECB Working Paper, 2510). https://doi.org/10.2139/ssrn.3797129
Hung, N. T. (2019). An analysis of CEE equity market integration and their volatility spillover effects. European Journal of Management and Business Economics, 29(1), 23–40. https://doi.org/10.1108/EJMBE-01-2019-0007
Hung, N. T. (2020). Market integration among foreign exchange rate movements in Central and Eastern European countries. Society and Economy, 42(1), 1–20. https://doi.org/10.1556/204.2020.00001
International Monetary Fund. (2013). 2013 Spillover report (IMF Policy Papers, 058. International Monetary Fund. https://doi.org/10.5089/9781498341561.007
Jordà, Ò., Sanjay R. S., & Taylor, A. M. (2022). Longer-run economic consequences of pandemics. The Review of Economics and Statistics, 104(1), 166–175. https://doi.org/10.1162/rest_a_01042
Khan, N. (2020). Spillover effects of trade shocks in the Central and Eastern European and Baltic countries. Journal of Economic Integration, 35(1), 39–68. https://doi.org/10.11130/jei.2020.35.1.39
Kim, H. (2013). Generalized impulse response analysis: General or extreme? EconoQuantum, 10(2), 135–141. https://doi.org/10.18381/eq.v10i2.165
Koop, G., Pesaran, M. H., & Potter, S. M. (1996). Impulse response analysis in nonlinear multivariate models. Journal of Econometrics, 74(1), 119–147. https://doi.org/10.1016/0304-4076(95)01753-4
Milesi-Ferretti, G.-M., & Tille, C. (2011). The great retrenchment: International capital flows during the global financial crisis. Economic Policy, 26(66), 289–346. https://doi.org/10.1111/j.1468-0327.2011.00263.x
Miranda-Agrippino, S., & Rey, H. (2020). U.S. monetary policy and the global financial cycle. Review of Economic Studies, 87(6), 2754–2776. https://doi.org/10.1093/restud/rdaa019
Miranda-Agrippino, S., Nenova, T., & Rey, H. (2020). Global footprints of monetary policies (Discussion paper, 2004). Centre for Macroeconomics (CFM).
Moder, I. (2019). Spillovers from the ECB’s non-standard monetary policy measures on South-astern Europe. International Journal of Central Banking, 15(4), 127–163.
Mohaddes, K., & Raissi, M. (2020). Compilation, revision and updating of the Global VAR (GVAR) database, 1979Q2–2019Q4 (Working paper). University of Cambridge. https://doi.org/10.17863/CAM.56762
Passari, E., & Rey, H. (2015). Financial flows and the international monetary system. The Economic Journal, 125(584), 675–698. https://doi.org/10.1111/ecoj.12268
Pesaran, H. H., & Shin, Y. (1998). Generalized impulse response analysis in linear multivariate models. Economics Letters, 58(1), 17–29. https://doi.org/10.1016/S0165-1765(97)00214-0
Pesaran, M. H., Schuermann, T., & Weiner, S. M., (2004). Modeling regional interdependencies using a global error-correcting macroeconometric model. Journal of Business & Economic Statistics, 22(2), 129–162. https://doi.org/10.1198/073500104000000019
Pesaran, M. H, Shin, Y., & Smith, R. J. (2000). Structural analysis of vector error correction models with exogenous I(1) variables. Journal of Econometrics, 97(2), 293–343. https://doi.org/10.1016/S0304-4076(99)00073-1
Pfeiffer, P., Varga, J., & Veld, J. (2021). Quantifying spillovers of next generation EU investment (European Economy Discussion Paper, 144). https://doi.org/10.2765/80561
Picek, O. (2020). Spillover effects from Next Generation EU. Intereconomics, 55, 325–331. https://doi.org/10.1007/s10272-020-0923-z
Rey, H. (2018). Dilemma not trilemma: The global financial cycle and monetary policy independence (NBER Working Paper, 21162). https://doi.org/10.3386/w21162
Rey, H., & Martin, P. (2006). Globalization and emerging markets: With or without crash? American Economic Review, 96(5), 1631–1651. https://doi.org/10.1257/aer.96.5.1631
Shin, H. S. (2014). The second phase of global liquidity and its impact on emerging economies. In K. Chung, S. Kim, H. Park, C. Choi, & H. S. Shin (Eds.), Volatile capital flows in Korea. Palgrave Macmillan. https://doi.org/10.1057/9781137368768_10
Smith, L. V., & Galesi, A. (2014). GVAR toolbox 2.0. Global VAR Modelling. https://sites.google.com/site/gvarmodelling/gvar-toolbox
Szent-Ivanyi, B., & Vigvari, G. (2012). Spillovers from foreign direct investment in Central and Eastern Europe. Society and Economy, 34(1), 51–72. https://doi.org/10.2307/41472187
Umar, M., Xua, Y., & Mirza, S. S. (2021). The impact of Covid-19 on Gig economy. Economic Research-Ekonomska Istraživanja, 34(1), 2284–2296. https://doi.org/10.1080/1331677X.2020.1862688
Wang, Q., & Han, X. (2021). Spillover effects of the United States economic slowdown induced by COVID-19 pandemic on energy, economy and environment in other countries. Environmental Research, 196, 110936. https://doi.org/10.1016/j.envres.2021.110936