Systemic Risk Impact on Economic Growth - The Case of the CEE Countries

The present paper analyses the systemic financial shock transmission mechanism in an empirical macro-financial model, estimated using a Time-Varying Parameter Vector Autoregression (TVP-VAR) with stochastic volatility. By introducing a robust measure that captures systemic risk stemming from the Eurozone financial markets, namely the Composite Indicator of Systemic Stress (CISS), along with the most relevant macroeconomic variables in a richly specified Bayesian framework, we study the time- varying impulse response functions in order to assess the structural changes that have appeared over the analyzed period. Our results suggest that, even though economies became less susceptible to systemic risk shocks after the outbreak of the financial crisis, recent years have brought a common development among analyzed countries, their main macroeconomic indicators seemingly growing more vulnerable to such shocks. We ascertain that, as a natural consequence of financial innovation, the financial system has become more robust by allowing a higher degree of connectivity and, subsequently, lowering the probability of systemic crisis episodes. Nevertheless, we also conclude that interconnectivity between financial institutions can lead to significant second-round effects, practically transforming the risk-sharing mechanism into a contagion transmission network, leading to potentially systemic events.