Fiscal policy, output and financial stress in the case of developing and emerging European economies: a threshold VAR approach

The aim of this discussion material will be to examine the effects of fiscal developments on economic activity and on the market condition over time. The study employs a threshold vector autoregressive approach for 10 Developing and Emerging Market economies in the Central Eastern and South Eastern European Countries. The financial stress index is constructed by considering a wide range of market patterns, including banking related stress, money market related stress, exchange markets stress and real estate markets related stress, upon which the threshold upon market condition is build. The threshold VAR model allows to analyses this interrelationship during episodes of economic downturn and stress in financial market. Finally, the empirical work considers a structural identification approach.