Output Volatility and Its Transmission in Transition Economies: Implications for European Integration
Following the 2008 financial crisis, the world’s attention was drawn to the periphery of the European Union, where economic openness and pegs to the Euro combined to destabilize the region. This study measures the output volatility of a set of Central and Eastern European countries from the early 1990s to 2011 using Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and GARCH-in-Mean models. Volatility “spillovers” are then tested with Vector Autoregressive and Multivariate GARCH techniques. Overall, six countries can be modeled as a GARCH process, and for three of these, volatility significantly reduces output growth. Volatility comovements are particularly strong among the Visegrad countries, while Romania seems fairly insulated from external shocks. This asymmetry of responses to other CEE countries and to foreign shocks suggests that expanding the Eurozone may lead to adjustment problems.
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