Linkages between the Eurozone and the South-Eastern European Countries: A VECMX* Analysis

Purpose In the present paper we assess the impact of the Eurozone’s economic policies on specific South-Eastern European countries, namely Bulgaria, Croatia, Cyprus, Greece, Romania, Slovenia, and Turkey. Design/methodology/approach Since the countries under investigation are connected to the European Union (EU) or the Eurozone and the economic interdependence among them is evolving, we carried out our analysis using the VECMX* framework. Findings Our results indicate that the transition economies in our sample react in a similar manner to changes in international macroeconomic policies. Cyprus and Greece react also in a similar way, but these responses are very small in magnitude. Finally, Turkey behaves in a different way, probably due to the inflationary pressures in its economy. In general, there is evidence of linkages and interdependence among the EU or Eurozone members of the region. Research limitations/implications We did not construct a full structural model proposed by economic theory, but instead we estimated a reduced-form model. Data limitation is one reason. The other reason is that our sample countries are extremely heterogeneous. Also, for most of the sample countries there is an acute problem of structural uncertainty of their economies yet. Practical implications The way that the economies under investigation react to changes in international macroeconomic policies, may influence the Eurozone policy makers regarding the implemented monetary policy. Originality/value To our knowledge, the above methodology is implemented for the first time in the sample countries and provides a detailed investigation regarding their economic policies and the effects of the Eurozone policies.