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Do countries catch cold when trading partners sneeze? Evidence from spillovers in the Baltics

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  • Kingsley I. Obiora

    (International Monetary Fund, Washington, DC)

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    Abstract

    How do countries respond to shocks from their major trading partners? This paper addresses the question in the context of the observed shifts in trade linkages between the Baltic countries and their major trading partners. Vector autoregression (VAR) models were used to examine the magnitude and sources of growth spillovers to the Baltics from key trading partners, as well as shocks from the real effective exchange rate (REER). Our results show there are significant cross-country spillovers to the Baltics, with spillovers from the EU outweighing those from Russia. Shocks to the REER generally depress growth in the Baltics, and this effect rises over time. We also find that financial and trade linkages are the dominant transmission channels of spillovers to the region, which explains the current realization of downside risks to the Baltics from the global slowdown. In general, therefore, these results suggest that the Baltics are susceptible to shocks from their key trading partners.

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    Bibliographic Info

    Article provided by Institute of Public Finance in its journal Financial Theory and Practice.

    Volume (Year): 34 (2010)
    Issue (Month): 2 ()
    Pages: 143-160

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    Handle: RePEc:ipf:finteo:v:34:y:2010:i:2:p:143-160

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    Related research

    Keywords: spillovers; Baltics; vector autoregression; financial and trade linkages;

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    1. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
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    7. Vladimir Klyuev, 2008. "Real Implications of Financial Linkages Between Canada and the United States," IMF Working Papers 08/23, International Monetary Fund.
    8. Siem Jan Koopman & Jo�o Valle E Azevedo, 2008. "Measuring Synchronization and Convergence of Business Cycles for the Euro area, UK and US," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(1), pages 23-51, 02.
    9. Alicia Garcia Herrero & Juan M. Ruiz, 2008. "Do trade and financial linkages foster business cycle synchronization in a small economy?," Working Papers 0801, BBVA Bank, Economic Research Department.
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    11. Zarnowitz, Victor, 1992. "Business Cycles," National Bureau of Economic Research Books, University of Chicago Press, number 9780226978901, September.
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