Explaining the impact of the global financial crisis on European transition countries: a GVAR approach

This study investigates how GDP and financial shocks in the EU-15 are transmitted to European transition countries, using a global vector autoregression (GVAR) approach. Our GVAR model is estimated for 32 countries over the period from Q1 1999 to Q4 2014. The results indicate that, while the estimated spillovers from negative shocks to GDP and financial stress in the EU-15 to European transition countries are always negative, the size of these effects varies considerably across regions. Notably, the Baltic countries’ GDP levels show the most severe and statistically significant impact from the shocks to both GDP and the financial stress index in the EU-15. Both types of shocks to the EU-15 appear to be propagated mainly through foreign credit flows, FDI and remittances, suggesting that the financial channel, particularly foreign credit flows, play a major role in the transmission of shocks to the Baltic countries. The examined Southeastern European (SEE) countries, on the other hand, are affected mainly by shocks to EU-15 GDP, which are propagated predominantly through exports, FDI and foreign credit flows. EU Member States in Central, Eastern and Southeastern Europe (CESEE) are less severely affected by shocks to EU-15 GDP, possibly because they represent more advanced transition countries and are better able to offset crisis effects and thus contribute to the resilience of the region.