Exchange rate spillovers in the CIS

Abstract

This paper estimates macroeconomic connectedness in the CIS (the Commonwealth of Independent States) through risk spillovers via the exchange rates. We 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. We find that macroeconomic risk in the region increases significantly during macroeconomic shocks and that it has maintained a higher average level since 2015, a difficult year full of regional and global challenges. Our findings also show that currencies managed by more flexible exchange rate regimes on average transmit macroeconomic risk in the region. Frequency variance decomposition demonstrates 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. Although short-term connectedness dominates the overall variance of the system, more severe macroeconomic shocks resonate greatly on all time horizons, i.e. they impact the system for a longer period of time and more deeply.