Managing Capital Flows in Eastern Europe 1
Proceedings of an international conference

 

The European Center of the International Center for Economic Growth, in Budapest on May 18-19, 2001 organized its first conference in the project “Managing Capital Flows in Eastern Europe” supported by the Ford Foundation in Budapest on May 18-19, 2001
The meeting brought together the project participants and numerous external experts from the academic, banking and policy making circles to discuss the initial findings of the papers, to determine the areas of further research within the project and to think about the region specific lessons and problems related to the management of capital flows in transition economies.
The participants of the meeting assessed the major issues related to the management of capital flows in transition economies based on the experiences of individual economies. The papers discussed the problems of capital flows in several advanced and less developed transition economies, allowing to compare different country experiences and to draw the first general and very tentative conclusions from these cases.

Boris Vujcic (National Bank of Croatia) analysed the lessons learned by Croatia from the capital inflows and their management. After presenting a brief overview of the major macroeconomic developments in the economy- which can clearly be divided to the period before and after 1999 – the author analysed the magnitude, structure of capital inflows to the economy. In his presentation Mr. Vujcic also discussed those instruments that were applied by the monetary authorities to mitigate the adverse impact of inflows which have been relatively smaller compared to the average of transition economies.

Pekka Sutela (Bank of Finland) described in his presentation the experiences of the small Baltic’s economies with managing capital inflows. While in several macroeconomic and institutional respects these economies are very similar (size, openness, per capita GDP), there are significant differences between them which affected the magnitude, structure and management of capital inflows. These differences were broadly presented by the author, who elaborated some aspects and lessons from the Baltic cases on the relationship between exchange rate regime and financial sector reform on the one hand and capital flows on the other one.

Sergei Drobyshevsky (Institute of Transition) described the macroeconomic developments and capital flows in Russia. His paper showed a picture for the Russian economy different from the most of transition economies as it has been characterized more by capital outflows than inflows. The author analysed the sources, costs and consequences of capital outflows, as well as the recent developments following the currency crisis of August 1998.

Dariusz Rosati (Warsaw School of Economics and National Bank of Poland) started his presentation by discussing the theoretical framework for assessing capital flows and their management, discussing in details the Impossible Trinity hypothesis and the sterilization problems. In his presentation on Poland he showed the waves of capital inflows, the major structure and reasons behind this behavior. He discussed the role of fiscal and exchange rate policies in the management of capital flows and presented evidence on the behavior of major monetary aggregates following the shift from exchange rate targeting to inflation targeting.

Thomas Holub (Czech National Bank) presenting his joint paper written with Zdenek Tuma (Czech National Bank) described the Czech experiences that differed sharply before and after the currency crisis of May 1997. He showed how the structure of inflows changed after the crisis and what have been the major concerns for monetary authorities in the recent years. His presentation reflected the importance of prudent fiscal policies and fiscal adjustment, as well as of sound financial sector in management of capital inflows.

Alexander Mantchev (Center for Economic Development) described in his presentation the experiences of Bulgaria with capital inflows, which have been relatively modest before the establishment of currency board in 1997 due to macroeconomic instability and slowness of structural reforms. Following the hyperinflation and currency crisis, the currency board brought deep changes in macroeconomic stability and this combined with accelerated structural reforms led to sizeable capital inflows. Although the economy has been hit by series of adverse exogenous shocks, the adherence to currency board and the tough fiscal and incomes policies helped in managing capital flows.

Vladimir Lavrac (Institute of Economics) analysed the case of an economy which has had a money targeting framework coupled with managed floating since the establishment of monetary independence. Although Slovenia has not been the economy attracting most of capital inflows, there were periods when sizeable inflows were recorded. Mr. Lavrac described the experiences with unremunerated reserve requirement used in similar to the Chilean case fashion. Besides that presenter analysed the dilemmas faced by monetary authorities in times of significant capital inflows which have however subsided in the recent years.

Gábor Oblath (Kopint Datorg) and Gyula Barabás (National Bank of Hungary) described the very special case of Hungary with its crawling peg exchange rate regime. The regime, combined with improving macroeconomic stability and rapid structural reforms, has been a source of significant capital inflows, which reached extreme volumes in certain periods. The authors analysed the structure of inflows pointing to the dominance of foreign direct investments. They also assessed the efficiency of macroeconomic policy measures aimed at managing flows, showing that while sterilization has been wide, the costs remained manageable. On other hand the loss of monetary policy independence as well as the worsening inflation performance forced the authorities to replace the earlier tightly managed exchange rate regime with more flexible one in 2001.

Daniel Daianu (CEROP) described the performance of the Romanian economy and its experience with capital inflows. As the economy experienced repeated crisis and boom-and –bust cycles, capital inflows have been relatively insignificant. The presentation has focused therefore more on the internal macroeconomic problems of the economy, pointing to the lack of fiscal prudence, low level of credibility of policy m makers, persistent and very unstable inflation. While these problems some times were aggravated by the inflow of mostly short-term, speculative capital, they served mostly as hindrance for more significant and long-term capital inflows.

Frantisek Hajnovic (National Bank of Slovakia) analysed the case of Slovakia, presenting initially the very different macroeconomic conditions before and after the currency crisis of 1998. He showed that the implementation of macroeconomic adjustments program and simultaneous acceleration of privatization and liberalization has contributed to the increase of capital inflows since 1999, which have been relatively low in the economy earlier. The author has also elaborated the instruments that have been applied by the central bank in the current monetary and inflation targeting framework to manage capital inflows.
Presenting the joint paper written with Claudia Buch Ralph Heinrich (Institute of World Economics, Kiel) described the microeconomic aspects of capital inflows. Giving a detailed theoretical overview of the banking sector developments, as well as of international capital flows, the author presented his views on the links between capital flows, financial vulnerability and currency issues. He stressed the role of sound financial sector, presence of appropriate regulatory and supervisory tools, the need to avoid the build-up of unsustainable net foreign positions. The authors described the special and different from other emerging regions features of capital inflows and net foreign asset position of advanced transition economies.

David Begg (Birkbeck College, London) compared in his presentation the experiences of capital flows in transition economies with the ones of economies joining recently the EU. He assessed the structure and macroeconomic consequences of capital inflows to Greece, Ireland, Portugal, Spain and Italy and drew some conclusions for the transition economies. In relation to this group he presented the links between financial openness, exchange rate regime and monetary policy, and capital inflows. In his paper he expressed the role of fiscal adjustment in managing capital flows especially in cases when monetary independence is seriously restricted