Resilience, contagion, and vulnerability to external financial crisis in CEE countries

The recent financial crisis had serious worldwide impacts. Initial resilience and good past performances led to the illusion that the Central and Eastern European (CEE) region was able to decouple from developments in advanced economies. This initial illusion was however immediately denied by the facts that the crisis spread to that region just with a lag. The CEE region was, in fact, suddenly placed at the epicenter of the emerging market crisis. Further, the consequences of the crisis were not uniform among countries of the CEE region. Strong cross-country disparities in the resistance and recovery capacities have been observed. Our research project aims to analyze and disentangle the resilience performance to the financial crisis within CEE countries according to their shock isolation and absorptive capacities. We develop and estimate (by Bayesian techniques) a DSGE model for a small- open economy. Our model is individually estimated for a sample of Central and Eastern European countries. It features nominal wage and price rigidities, as well as financial frictions in the form of liquidity constrained households and limited access to deposits for the bank system. We focus on two dimensions of the regional resilience: resistance and recovery. Specifically, by using our estimation we aim to quantify the relative vulnerability or sensitivity of economies within CEE region to disturbances and disruptions (resistance) and the speed and extent of recovery from such a disruption or recession (recovery).