On the crossroads between Europe and Asia: Is Ukraine more economically integrated with European Union or Russian Federation?

Abstract

In the recent decades, the integration process of economies has been increasingly important in the present age of globalization. This issue becomes an important problem for economies that are located between two different economic unions and facing the decision on which one to join. In this thesis, the cointegration effects and short-run and long-run linkages are investigated between economies of European Union and Ukraine on one side, and Ukraine and Russian Federation on the other side. To understand this problem, empirical data is collected comprising of the most important macroeconomic indicators describing the economies considered in the study. By applying two popular time series econometric techniques (vector autoregressive model and cointegration technique), we examine a short-run and long-run relationship between interest rate, consumer price index, unemployment rate, GDP and trade balance ratio in all analyzed countries: European Union, Ukraine and Russia from 2001 to 2016 Q3. Empirical findings of the thesis can be summarized as follows. First of all, there exists a long-run cointegration effects between analyzed economies, however a number of cointegration vectors is different between analyzed countries. Secondly, mostly unidirectional Granger causality was observed, which shows that one economy has strong influence on another country economy. Thirdly, impulse responses analysis shows the strength of the influence of the one economy to another one.