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Output Spillovers from Trade and Financial Linkages in Central and Eastern European Countries: A Panel Analysis

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  • Bogdan Murarasu
  • Alina Bobasu

Abstract

This paper studies the impact of international trade and foreign direct investments on economic growth in Central and East European countries using static and dynamic panel data estimation methods. The results mostly point towards a positive effect of trade and financial openness on economic growth, although the magnitude of the impact depends of the econometric method used. The paper also assesses the impact of trade and financial linkages on output comovements between regions. The measured influence of trade linkages is more reduced compared with the impact of financial linkages, especially during crisis periods. The empirical analysis identifies a significant negative effect of financial integration on output synchronization, conditional on global shocks. The impact of financial linkages on output synchronization during crises is changing compared to normal economic situations. During normal times, increased financial linkages generate higher output divergence since capital is flowing to the regions where it is most productive. In contrast, during the crisis period, regions which know a high degree of integration, especially through the banking system experienced a significant increase in their economic growth comovement. In order to safeguard the benefits of financial integration while reducing the negative effects stemming from financial crisis is of the utmost importance to implement better prudential oversight and policy coordination.

Suggested Citation

  • Bogdan Murarasu & Alina Bobasu, 2014. "Output Spillovers from Trade and Financial Linkages in Central and Eastern European Countries: A Panel Analysis," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 6(2), pages 081-096, December.
  • Handle: RePEc:rfb:journl:v:06:y:2014:i:2:p:081-096
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