THE IMPACT OF KEY VARIABLES FROM THE WORLD FINANCIAL MARKET ON THE ECONOMY OF BOSNIA AND HERZEGOVINA // UTICAJ KLJUČNIH VARIJABLI SA SVJETSKOG FINANSIJSKOG TRŽIŠTA NA BOSANSKOHERCEGOVAČKU EKONOMIJU

Abstract

In line with the previous surveys, conducted in developed economies, we selected a group of variables for the construction of the VAR model. We tested the link between variables of global financial market and domestic macroeconomic variables. In the VAR model we set the restriction in the way that domestic economic variables cannot affect global variables. We have chosen variables from leading global market – the USA. The key exogenous variables where federal funds rate, index of implied volatility, VIX, while S&P 500 was the control variable. We measured the impact of foreign interest rate and volatility i.e. uncertainty on domestic variables: wages, CPI, employment and industrial production. The world financial market and the real sector in Bosnia and Herzegovina are connected. Federal Fund Rate (FFR) has the influence on wages, employment and industrial production in Bosnia and Herzegovina. Shock in FFR (growth in FFR) leads to contraction of economic activity in Bosnia and Herzegovina; industrial production decrease, employment and also wages. Growth in global financial market volatility, i.e. growth in VIX index, negatively influences the domestic macro variables, but this influence is weaker than the influence of FFR, and is significantly lower. Changes in FFR and VIX have week and statistically insignificant impact on domestic consumer price level in Bosnia and Herzegovina, because domestic CPI is determined by price level in euro zone and by price level of world commodities. We have confirmed the working hypothesis about connection of domestic economy with key variables in the world financial market, and our final conclusion is that the interest rate channel (FFR) has a very strong influence on domestic economy at the significance level of 95% and 68%. The economy of Bosnia and Herzegovina, although in much less extent then FFR, is also affected (at around 68% level) by uncertainty in the global financial market, measured by volatility i.e by using VIX. The new research on this topic should establish a link between key variables in euro zone and macroeconomic performance of domestic economy.