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Do countries catch cold when trading partners sneeze? Evidence from spillovers in the Baltics

Kingsley I. Obiora, International Monetary Fund, Washington, DC, USA

How do countries respond to shocks from their major trading partners? This paper addresses the question in the context of the observed shifts in trade linkages between the Baltic countries and their major trading partners. Vector autoregression (VAR) models were used to examine the magnitude and sources of growth spillovers to the Baltics from key trading partners, as well as shocks from the real effective exchange rate (REER). Our results show there are significant cross-country spillovers to the Baltics, with spillovers from the EU outweighing those from Russia. Shocks to the REER generally depress growth in the Baltics, and this effect rises over time. We also find that financial and trade linkages are the dominant transmission channels of spillovers to the region, which explains the current realization of downside risks to the Baltics from the global slowdown. In general, therefore, these results suggest that the Baltics are susceptible to shocks from their key trading partners.

Keywords:  spillovers, Baltics, vector autoregression, financial and trade linkages

Year:  2010   |   Volume:  34   |   Issue:  2   |   Pages:  143 - 160

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 June, 2010
II / 2010
EBSCO Publishing
ISSN 1846-887X
e-ISSN 1845-9757
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