MEASURING THE DYNAMICS OF CZECH REPUBLIC OUTPUT CONNECTEDNESS WITH THE GLOBAL ECONOMY

Czech Republic is a Central European market economy that emerged following the peaceful dissolution of the former Czechoslovakia. It is an economy driven mainly by manufacturing, services and innovation, with a dynamic external sector. Its dependence on exports makes output growth vulnerable to shocks or contractions in external demand, thereby necessitating this study, which examines the dynamics of its output connectedness with the global economy from 1990Q1 to 2016Q4 using the Diebold and Yilmaz (2009) network approach. The results indicate that Czech’s output connectedness with the rest of the world is quite sizeable, with a total connectedness index of 82% over the above period. The results also show that EU member countries, especially Germany, exert the most dominant output influence on the Czech economy and therefore have the potential to spread output shocks to it, while Poland and Slovakia are most susceptible to output shocks emanating from the Czech economy. Furthermore, the role of the USA in the Czech economy increased remarkably after the 2012/2013 economic recession in the Czech Republic. These results suggest that the Czech economy is considerably open, deeply interconnected and sensitive to international output shocks such that policymakers in the Czech Republic must be constantly conscious of headwinds originating from the aforementioned sources.