Paper abstract:

This study attempts to examine the quantitative impact of financial shocks on society, more precisely on the nation`s income within sustainable development in the Kyrgyz Republic. We focus on financial shocks as they have received wide attention in the policy debate after the global financial-economic crisis of 2008. Seasonally adjusted quarterly data from 2008 to 2019 was used to study the transmission mechanism of the financial shocks on the nation`s income in the Kyrgyz Republic by employing the vector autoregression approach (VAR). The data set includes the following variables: gross national product on purchasing power parity rates (GNI), deposits of the banking system of Kyrgyzstan, credits of the banking system, remittances inflow, foreign direct investment inflow, CPI (consumer price index).

The conducted empirical analysis indicated that the wealth of the nation in the Kyrgyz Republic is affected by financial shocks through the transmission channels, in particular, remittances inflow, exchange rate, and banking (deposit and credit) channels, which afterwards influence the GNI of the country. In the first stand of results, it was revealed that the effects of an external shock disseminated through the channels of transmission and had an impact on national income. The second strand of the results investigates the positive relationship between transmission channels as remittances inflows, banking sector and GNI within the first six quarters. Thus, a decline in the variables has a significant affirmative effect on the nation`s income which in turn affects consumption. On the other hand, the response of remittances to a GNI shock is positive, statistically significant and has a multiplicative effect within the ten periods. From the empirical standpoint, an exception is the exchange rate channel that adversely influences GNI within first four quarters. Particularly, the variance decomposition analysis demonstrated that in a baseline specification, almost 17 % of 1 % standard deviation in GNI explained by deposits, 16 % by remittances 16 % (which in turn has effects on FDI by 22 % and on exchange rate by 33 %), by CPI 1 %, while own shock accounts for 60 % within the first 6 months. Therefore, the policymakers of the Kyrgyz Republic may foresee the crisis transmission through for above- mentioned transmission channels.