Global value chains and industrial production spillovers: Where does the cee region stand?

Abstract

The present paper aims at developing a better understanding of how the industrial sectors in different countries influence each other and how developments on western markets impact the growth rates of emerging economies, with a focus on the CEE region. Applying a framework developed by Diebold and Yilmaz (2009), we assess bilateral spillovers between a large set of EU members’ Industrial Production Indices and find that, after the downturn episode of 2009-2011, spillover effects have significantly grown in importance. Therefore, we estimate an Industrial Production Spillover Index and assess whether including the index in a BVAR forecasting framework can lead to an increase in forecast accuracy, for selected CEE states (the Czech Republic, Poland, Hungary and Romania). Using multiple calibration strategies to ensure robustness, we find an overall increase in forecasting accuracy for Hungary, followed by the Czech Republic and Romania, where the results are mostly positive in favor of including the index, but also depend on the choice of the calibration methodology. Conversely, the results for Poland show that the augmented model offers lower forecast accuracy, in all the considered cases. Our main policy recommendation is related to assessing whether information related to industrial sector spillovers is relevant in explaining real growth dynamics and potentially including this information in the overall framework for monitoring macroeconomic policy. The policy implications brought by spillover effects highlight certain fragilities of the CEE economies, which are especially vulnerable in case of a slowdown in industrial activity in the Western EU states.