Trade openness and output comovement in EU emerging countries: A panel data approach

Abstract

This paper studies the impact of international trade and financial linkages on output dynamics in European Union emerging economies using static and dynamic panel data methods. The results indicate a positive effect of economic openness on GDP growth while the impact of trade and financial linkages on output comovements between emerging markets and European Union depends on the state of economy. The impact of financial linkages on output synchronization during crises is changing compared to normal economic situations. During normal times, increased financial linkages generate higher output divergence since capital is directed to the regions where it is most productive. In contrast, during the crisis period, regions which know a high degree of integration, especially through the banking system experienced a significant increase in their economic growth comovement. The measured influence of trade linkages is more reduced compared with the impact of financial linkages, especially during crisis periods. In order to safeguard the benefits of financial integration while reducing the negative effects stemming from financial crisis is of the utmost importance to implement better prudential oversight and policy coordination.