Can Trade Partners Help Better Forcee the Future? Impact of Trade Linkages on Economic Growth Forecasts in Selected Cesee Countries

Abstract

For Central, Eastern and Southeastern European (CESEE) countries, the euro area is the most important export destination. Nevertheless, geographical export patterns differ among individual CESEE countries, and economic growth within the euro area has diverged in the run-up to and since the economic and financial crisis. We therefore examine the effects such heterogeneous developments have had on trade – and thus economic growth – in CESEE. Given the importance of such spillovers for macroeconomic projections, we evaluate the OeNB’s macroeconomic forecasting model (FORCEE) for Bulgaria, Croatia, the Czech Republic, Hungary, Poland and Romania. The FORCEE model captures trade spillovers via aggregate demand from the euro area. We challenge this simplification by introducing a more differentiated representation of the regional structure of trading partners. Our results show that such a modification improves the forecasting performance of our structural macro model in particular for the three Southeastern European countries in our sample. However, our tests do not yet account for the additional uncertainty introduced into the model by broadening the set of external assumptions, when we cover external demand from a wider range of partner countries.

Keywords: trade linkages, forecasting, Central, Eastern and Southeastern Europe

JEL Classification: C14, C53, E37, F17