Essays on Former Transition Economies and International Spillovers

The topic of international spillovers and shock transmission has become even more important than before during the past couple of decades as international economic integration has widened and deepened significantly. Correspondingly, it has become increasingly important to take international disturbances into account when analyzing and forecasting the developments of any individual economy and in designing appropriate economic policies. Therefore, we empirically examine the significance and transmission of international shocks in the four essays of this work. We also try to evaluate the trends in shock transmission during the past couple of decades. Our work focuses on certain former transition economies (i.e., countries that have shifted from a planned economy to a market economy during the past decades). In the first two essays, our focus is on countries of the Commonwealth of Independent States (CIS), and in the two last essays we look at China.

In the first essay, we examine the pass-through of exchange rates and commodity prices to consumer prices in several CIS countries in the period 1999-2014. We provide up-to-date estimates for the pass-through effects in the CIS economies by using a methodology that is novel for these countries and which controls for a wider range of factors than in the previous literature and allows us to take into account the effects of idiosyncratic and common factors in CIS consumer price trends. We use a panel framework with a mean group estimator that controls for cross-sectional dependence. Our results indicate that exchange rate pass-through is still relatively high and rapid in the CIS countries. In addition, global factors are important for consumer price trends in the CIS countries. We also find evidence of an asymmetrical effect in the case of exchange rate pass-through, indicating that exceptionally large exchange rate shocks transmit more strongly and rapidly to consumer prices than small changes.

The second essay examines the spillover effects from foreign output shocks and oil price shocks on output in CIS countries with a global vector auto regressive (GVAR) model. We provide up-to-date estimates and a more detailed analysis on the impacts of foreign output shocks on the output of CIS economies than in earlier research. We compare the spillovers by region of origin, analyze the role of direct and indirect trade and financial channels, and examine the evolution of these effects during the past couple of decades. We find that CIS economies are highly sensitive to both regional and global shocks, although there is wide variation across individual countries. Our results also indicate that the sensitivity of the CIS economies to global and regional shocks has changed notably during the past couple of decades. Finally, our results illustrate the importance of effects arising from indirect trade and financial channels.

The third essay features an analysis of Chinese production chains and, in particular, the role of the services in them. Our analysis complements the previous literature on global value chains by providing more detailed information on the significance of Chinese services and provides additional insights into Chinese economic development in qualitative terms. We apply the standard input-output techniques to the recently compiled World Input-Output Data (WIOD) covering the years 2000-2014 and decompose the global value-added production in value chains, showing the origin of the value added by country and sector. We analyze the characteristics and the development of Chinese value chains in comparison to other countries’ chains. We also apply a constant market share analysis (CMS) to the global value-added production and exports. Our results suggest that the role of Chinese services has become more important in global value chains, especially in domestic ones but, increasingly, in foreign production chains too. The CMS analysis further suggests that services have also become a more important factor in recent years, supporting Chinese competitiveness both in domestic and foreign markets. Therefore, our results provide, on their part, support for the perception that Chinese production is gradually shifting towards higher value-added production stages.

In the fourth essay, we examine the international transmission and impact of various China-specific shocks. We consider shocks to Chinese final demand at the aggregate level, bilateral import tariffs between the U.S. and China, and sector- specific shocks to Chinese final demand and supply. We utilize the input-output framework applied to the latest WIOD table for 2014 for the analysis. We aim at assessing the international transmission and importance of the China-specific shocks and also compare the estimates achieved from the simple input-output framework to the results from more complex models in earlier literature. Our results suggest that aggregate-level China-specific shocks may also have important effects for several other countries, but the transmission of the shocks through the global production network is relatively limited since Chinese production is not very import- intensive. Our estimates calculated with the input-output framework are quite close to the results presented in the previous literature, but mainly located at the lower end. Concerning sector-specific shocks, we find that in general the international impact of Chinese sector-specific final demand and supply shocks is relatively modest at the aggregate level, but there are certain exceptions.