Journal of Economics and Development Studies

World Financial Frictions and the Economy of the Czech Republic and Slovakia
Karol Szomolányi, Martin Lukáčik, Adriana Lukáčiková

Abstract
Business cycles in emerging market economies are correlated with the interest rate that these countries face in international financial markets. From this statement follows a question: what fraction of business cycle fluctuations is due to movements in country interest rate? The vector auto-regression model specification can be used to quantify the macroeconomic effects of world interest rate shocks and country’s interest spread shocks. We consider that analyzed economies – Czech Republic and Slovakia – are small emerging and open. Therefore we use the specification to investigate the impact of world financial frictions on the Czech economic activity and Slovak economic activity in the period 2001 – 2012 and, viceversa, the impact of every country overall economic activity on its interest spread premium.

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