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The transmission of foreign shocks to South Eastern European economies

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Abstract

This paper investigates the transmission of foreign shocks to economic activity and macroeconomic policies in three South Eastern European (SEE) economies: Croatia, Macedonia and Bulgaria. Specifically, we provide empirical evidence on the influence of several policy and non-policy shocks (euro-zone output gap, money market rate and inflation) on economic activity as well as monetary and fiscal policies in the three countries. The main motivation behind our empirical investigation is the fact that all of these economies are small open economies with rigid exchange rate regimes and different degree of integration within the European Union (EU). As for the methodological issues, we employ recursive vector autoregressions to identify the exogenous shocks in the euro-area. Generally, the estimated results imply that euro-zone economic activity has significant and relatively strong influence on these economies where foreign output shocks are transmitted relatively quickly. The results also suggest that the effects of foreign shocks are of larger magnitude in the countries that are more integrated with the EU. An additional finding is that positive foreign interest rate shocks trigger a contractionary response of domestic monetary policy notwithstanding the fact that domestic money market rates are not linked with euro-zone interest rates. Finally, euro-zone inflation is instantly transmitted to domestic inflation. We can explain these effects by several factors, such as: the fixed exchange rates, the relatively high trade integration of SEE economies within the euro-zone as well as the dependence of SEE banks on foreign financing.

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Notes

  1. The results from the unit root tests are available from the authors upon request.

  2. This argument is based on estimating correlation coefficients between central and general government balances for a broader sample of 31 countries that are member states of the European Union (EU) including the aggregated data for EU and the Euro-zone (EMU). The correlation coefficients based on annual data set indicated that there is a highly positive association (estimated higher than 0.9), in almost all countries in the sample with the exceptions of Latvia, Poland and Sweden where the level of correlation was estimated a bit lower around 0.8. All these correlation coefficients are statistically significant at 1 % level.

  3. Cyclical adjustment of the budget revenues and expenditures was done according to the output gap movements with imposed elasticity coefficients for budget revenues of 1 and for budget expenditures of 0.

  4. The results from the lag length selection criteria, residual-based diagnostic tests and stability tests are available from the authors upon request.

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Acknowledgments

This research was supported by a grant from the CERGE-EI Foundation under a programme of the Global Development Network. The authors are grateful to the Journal’s editor and the two anonymous referees, as well as Sergey Slobodyan, Karsten, Staehr, Magdalena Petrovska, and participants at workshops and conferences in Skopje and Banja Luka for their helpful comments and suggestions. All opinions expressed are those of the authors and have not been endorsed by CERGE-EI, GDN, the National Bank of the Republic of Macedonia or the World Bank Group.

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Authors and Affiliations

  1. Faculty of Economics, Saints Cyril and Methodius University, Goce Delchev Blvd. 9B, 1000, Skopje, Macedonia

    Goran Petrevski & Dragan Tevdovski

  2. Kuzman Josifovski Pitu 1, 1000, Skopje, Macedonia

    Jane Bogoev

  3. 1818 H street, Washington, DC, 20433, USA

    Jane Bogoev

Authors
  1. Goran Petrevski
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  2. Jane Bogoev
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  3. Dragan Tevdovski
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Corresponding author

Correspondence to Goran Petrevski.

Additional information

While writing the paper Jane Bogoev was with the National Bank of the Republic of Macedonia.

Appendices: IRFs of recursive VAR with 95 % confidence intervals of Efron and Hall, respectively

Appendices: IRFs of recursive VAR with 95 % confidence intervals of Efron and Hall, respectively

1.1 Appendix 1: Impulses generated from the output gap in the euro-zone

figure a

1.2 Appendix 2: Impulses generated from the Euribor

figure b

1.3 Appendix 3: Impulses generated from the euro-zone inflation

figure c

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Petrevski, G., Bogoev, J. & Tevdovski, D. The transmission of foreign shocks to South Eastern European economies. Empirica 42, 747–767 (2015). https://doi.org/10.1007/s10663-014-9275-x

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  • DOI: https://doi.org/10.1007/s10663-014-9275-x

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