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How Trade Composition Affects Sensitivity to Foreign Shocks: Applying a Global VAR Model to Ukraine

Author

Listed:
  • Oleksandr Faryna

    (National Bank of Ukraine
    National University of Kyiv-Mohyla Academy)

  • Heli Simola

    (Bank of Finland Institute for Economies in Transition)

Abstract

This paper studies the transmission of foreign output shocks to real activity in Ukraine through international trade. We employ a global vector auto regressive (GVAR) model that captures about 80% of the world economy and incorporates time-varying trade and financial weights. According to our estimates, a mild recession in the US of a 1% drop in output generates a substantial recession in Ukraine of about 2.2%. A similar drop of output in the euro area and Russia translates to a drop in output of about 1.7% in Ukraine. Finally, the same drop of output in CEE, China, or the CIS leads to an output decline of about 0.4% in Ukraine. Meanwhile, Ukraine’s response to euro area output shock has been steadily increasing over the last couple of decades due to changes in global trade flows. Ukraine’s sensitivity to shocks in the US and euro area is notably strengthened by indirect trade effects, while the response to shocks from emerging economies, i.e., China, CEE, the CIS, and partially Russia, is mainly determined by bilateral trade linkages.

Suggested Citation

  • Oleksandr Faryna & Heli Simola, 2019. "How Trade Composition Affects Sensitivity to Foreign Shocks: Applying a Global VAR Model to Ukraine," Visnyk of the National Bank of Ukraine, National Bank of Ukraine, issue 247, pages 4-18.
    • Handle: RePEc:ukb:journl:y:2019:i:247:p:4-18
    DOI: 10.26531/vnbu2019.247.01
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    More about this item

    Keywords

    Ukraine; global VAR; foreign shocks; trade compositions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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