Business Cycles, Exchange Rates, and Commodity Prices in Transition Economies

Abstract

My dissertation studies macroeconomic connectedness in the transition economies through the business cycle and exchange rate channels and the downside risk relationship between commodity prices and exchange rates of developing economies. My first two chapters focus on the transition economies of the Commonwealth of Independent States, the CIS, a group of former Soviet republics, and my third chapter considers other developing countries too. The first chapter examines macroeconomic connectedness in the CIS region through business cycle synchronization. I investigate the role of the global factor and the CIS factor in evolution of business cycles in the CIS countries by applying a dynamic factor model. In addition I also examine whether the role of these two factors has changed over time. Results indicate that overall business cycle synchronization of these countries within the region and globally is low. Russia is the most globally integrated CIS country and Belarus displays the highest degree of comovement with the CIS factor. The results show that 2014 Russo-Ukrainian conflict and subsequent Russian sanctions had a profound effect on the region leading to an increase in synchronization within the CIS and decline in the role of the global factor. The second chapter estimates macroeconomic connectedness in the CIS countries through risk spillovers via the exchange rates. I collect high frequency daily data on exchange rates from January 2006 to July 2020 and use the Diebold-Yilmaz method of variance decomposition, as well as the Barunik-Krehlik method of frequency variance decomposition, for the analysis. I find that macroeconomic risk in the region has maintained a higher average level since 2015, a difficult year full of regional and global challenges. Currencies managed by more flexible exchange rate regimes (the Euro, Russian ruble, Armenian dram, Georgian lari, Ukranian hryvnia) on average transmit risk in the region. Time-frequency decomposition signifies that while the majority of risk transmission is smaller-scale and short-lived, spillovers from main regional and global crises are bigger and more persistent. The third chapter evaluates the impact of commodity price changes on the exchange rate changes for developing countries that are major exporters of selected globally important commodities. In particular, I focus on the tail behavior of this relationship since extreme events often have undesirable macroeconomic consequences such as inflationary pressure. I achieve this by estimating quantile regressions and subsequently using them to calculate tail risk measures of expected shortfall and longrise. My findings show that commodity price changes are negatively impactful on the exchange rate changes during depreciation episodes. Moreover, tail risk magnitudes have increased since the Great Recession. The results obtained in this chapter show that commodity dependent economies have been exposed to more macroeconomic risk through the exchange rate channel and that commodity price changes could be an associated signal of downside risk to exchange rate changes.