Propagation of economic shocks from Russia and Western European countries to CEE-Baltic countries

Abstract

What is the relative importance of Russia and Western European countries on Central and East European and Baltic (CEE-Baltic) countries? This paper tries to address this question by quantifying and comparing the spillover effects of growth and trade shocks coming out of Russia and five major Western European countries on ten CEE-Baltic countries by using a global vector autoregression (GVAR) model. In constructing the foreign variables, a time-varying trade weight is used instead of a fixed weight in order to take account of the financial crisis of 2007–2008 and the recent economic sanctions on Russia. The results show that growth spillover effects are strong in the region. However, shocks to Russia have higher and persistent spillover effects on CEE-Baltic countries compared to shocks to Western European countries. Spillover effects of growth shocks also show that Russia is affected more by Western European countries than the other way round. Trade balance shocks, on the other hand, do not play an important role in this transmission process.