Synchronization Of Economic Shocks In The Visegrad Group: An Empirical Assessment

The main goal of the paper is to assess a degree of coherence of macroeconomic shocks in the Visegrad Group (Czech Republic, Hungary, Poland and Slovak Republic, collectively: V4). We set out to consider the historical decomposition of unobservable supply and demand disturbances among V4 economies from 1995 to2013. In order to extract the underlying supply and demand shocks in V4 economies we employ a bivariate vector autoregressive model with a long-term structural decomposition (SVAR). The identification scheme is based on the theoretical aggregate supply-aggregate demand model. Thus we assume that supply shocks have a permanent impact on both output and prices, while demand shocks only temporarily influence output. The model parameters are estimated numerically using maximum likelihood method. Once the disturbances are obtained, we build 9-period moving window of correlation coefficients and compute their range as a statistical measure of magnitude. Eventually, based on SVAR decomposition, we construct impulse response functions to structural shocks. Concerning the supply shocks, we find that the correlation among the V4 Group is lower than in any other chosen sub-sample. The V4 countries are characterized by low correlation coefficient both with each other and with other EU economies. Furthermore, the supply shocks in the V4 Group are significantly stronger than in the ‘old’ member states. When compared to the peripheral EMU countries, the V4 economies show fast adjustment to this type of shocks. The demand shocks among the four economies are described by the highest correlation among all chosen sub-samples. The dynamic approach revealed that the synchronization of the demand shocks in the V4 Group was stronger even when compared to the EMU core. The adjustments to the demand shocks in the V4 countries are relatively elastic and these economies tend to converge to long-run equilibria in a fast pace.