Panel regression for the GDP of the Central and Eastern European countries using time-varying coefficients

TL;DR

This study addresses how seven macroeconomic factors drive GDP per capita growth and convergence among 11 Central and Eastern European countries from 1995 to 2024 using a time-varying coefficient panel framework. The authors estimate the dynamic panel equation $\Delta y_{i,t}=\alpha_t + \sum_{j=1}^d \beta_{t-1,j} x_{i,t-1,j} + e_{i,t}$ to obtain time-paths of the coefficients $\beta_t$ and decompose growth into component contributions $\Delta y_{i,t,j}=\alpha_t/d+\beta_{t-1,j} x_{i,t-1,j}$, with additional metrics $\kappa_{i,t,j}$ and $\gamma_i(t)$ to quantify private-debt effects. Key findings show that price level (Penn effect) and the achieved level of GDP are primary drivers, while private debt exerts a negative and highly country-specific influence, particularly after the 2008 crisis; FDI, trade, and gross capital formation also contribute positively. The results have policy relevance for debt management and openness strategies to sustain faster catch-up, and demonstrate the utility of time-varying coefficient panel methods in macroeconomic growth analysis.

Abstract

The integration of Central and Eastern European (CEE) countries into the European Economic Area serves as a valuable experiment for the regional economic development theory. The long-lasting convergence of these economies with more advanced Western Europe exhibits a few standard features and varying policies implemented. Even the Baltic countries, which started from very similar starting positions, demonstrate their unique trajectories of development. We employ a panel data regression model that allows coefficients to vary over time to compare the contributions of a few macroeconomic factors to the GDP growth of CEE countries. In particular, we regress the annual change of GDP per capita in PPP terms as a function of achieved GDP, price, trade, investment, and debt levels. Time-varying common slope coefficients in this approach describe the external economic environment in which countries implement their own policies. The panel consists of 11 Central and Eastern European countries (Bulgaria, Czechia, Estonia, Croatia, Latvia, Lithuania, Hungary, Poland, Romania, Slovenia, and Slovakia), which have been observed annually from 1995 to 2024. While the main selected factors of this investigation contribute to economic growth, in agreement with previous findings, the role of private debt appears vital in determining the pace of economic growth.

Figures (6)

• Figure 1: The price index and GDP/pc PPS scatter plot for the EU countries in 1995 and 2024. Red - CEE countries except those in the Baltic region, green - Baltic countries, blue - the rest of the EU countries. The line exhibits the least squares trend for all EU countries.
• Figure 2: The GDP/pc PPP rank change of the Central and Eastern European countries.
• Figure 3: The comparison of Baltic countries. The first sub-figure compares GDP per capita in PPS, and the second one compares private debt, % of GDP.
• Figure 4: The comparison of regressed GDP's for the Baltic countries with statistical data.
• Figure 5: The comparison of component contributions to the GDPs of the Baltic countries.