CEU Electronic Theses and Dissertations, 2010
| Author | Magyari, Ildiko |
|---|---|
| Title | Disentangling the Impact of Eurozone Interest Rate Movements on CEECs' Business Cycle Fluctuations: The Role of Country Spread |
| Summary | This paper investigates the relationship between the Eurozone interest rate, country spread and business cycle fluctuations in a sample of five CEECs: Bulgaria, the Czech Republic, Hungary, Poland and Romania. Henceforth, I propose two extensions to the Chang and Fernandez (2009) model. The first builds on the idea that both households and firms face the same interest rate, by assuming that country spread is not only the function of Solow residual but it also depends non-linearly on the external debt position of the country. The second extension merges two distinct approaches used in the emerging economy business cycle literature (i.e. endogenous versus exogenous country spread). Thus, I assume that country spread is a function of its own lagged values (i.e. country spread itself follows a persistent AR(1) process) which is augmented by domestic economic fundamentals (i.e. Solow residual and a nonlinear function of external debt position) and by the Eurozone interest rate. I estimate the model by using Bayesian techniques. By comparing the theoretical business cycle moments and impulse responses with those computed and estimated from the data of the five sampled CEECs, I show that the second extension performs better in replicating both business cycle moments and historical impulse responses than the original model or the first extension (i.e. the theoretical response of output to Eurozone interest rate shock is about twice as large as those derived from the original model). This result suggests that persistent and endogenous country spread could serve as an amplification mechanism of the impact of Eurozone interest rate shocks on the small open economy and improves the performances of the original model to replicate CEECs' business cycle moments. |
| Supervisor | Péter Benczúr |
| Department | Economics MA |
| Full text | https://www.etd.ceu.edu/2010/magyari_ildiko.pdf |
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