Financial Contagion in Transition Economies: Evidence from VAR Models for Romania and Moldova

Financial contagion is an important mechanism by which macroeconomic and financial shocks are transmitted between different sectors of the economy, like a domino effect. The effects of financial contagion can affect economic stability and performance. This study analyzes the dynamics of financial contagion in two economies in transition, Romania and the Republic of Moldova. From a methodological point of view, the Vector Autoregressive (VAR) model and the Diebold-Yilmaz spillover index will be used. The Gross Domestic Product (GDP), Dynamic General Equilibrium Model-Based (DGE) estimates of informal output, Domestic Credit to Private Sector (DCPS), Foreign Direct Investment (FDI), Trade (TRD) and Inflation (INF) indicators are analyzed for the period 2000 - 2024. The variables were selected to represent the real economy, the financial sector, foreign investment, trade, macroeconomic stability and the informal economy. The results obtained highlight significant structural differences between the two economies. In Romania, financial contagion is relatively limited and short-lived, being absorbed mainly through internal adjustment mechanisms, including the informal economy, which plays a predominantly adaptive role. In contrast, the Republic of Moldova presents a much more pronounced and persistent contagion regime, characterized by a high dependence on external shocks, transmitted mainly through foreign direct investment and the banking sector, as well as an amplifying role of the informal economy. The analysis of directional spillovers confirms that, while the real economy in Romania occupies a relatively balanced position in the contagion network, in the Republic of Moldova it acts predominantly as a receptor of systemic shocks. The results underline the importance of the institutional structure and the degree of informality in determining the vulnerability of economies to financial contagion and offer relevant implications for macroeconomic and financial stability policies.