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The Effect Of Macroeconomic Shocks On A Small Open Economy With Financial Accelerator: Lessons For Eastern Europe

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Executive Summary

This paper considers the effect of four shocks on the economies of the ten Eastern European transitional countries that recently joined the European Union. Each of these shocks stems from the process of integration and financial liberalization that these countries experience as they move from a centrally planned to a market economy. The paper uses a calibrated small-open-economy dynamic stochastic general equilibrium model with a financial accelerator in the household sector to assess the effect of these shocks on various macroeconomic variables. The four shocks considered are positive productivity growth in tradable, increased access to household credit, a decline in the cost of imports and a fall in spreads.

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