Managing Capital Flows

Managing Capital Flows

The Search for a Framework

ADBI series on Asian Economic Integration and Cooperation

Edited by Masahiro Kawai and Mario B. Lamberte

Managing Capital Flows provides analyses designed to help policymakers develop a framework for managing capital flows that is consistent with prudent macroeconomic and financial sector stability.

Chapter 7: Managing Capital Flows: Experiences from Central and Eastern Europe

Jürgen von Hagen and Iulia Siedschlag

Subjects: asian studies, asian economics, development studies, development economics, economics and finance, asian economics, development economics

Extract

* Jürgen von Hagen and Iulia Siedschlag INTRODUCTION 7.1 The twelve states that entered the European Union (EU) in 2004 achieved considerable macroeconomic stabilization during the accession process. Given the different initial conditions and economic characteristics of Cyprus and Malta, we focus on the Central and Eastern European (CEE) countries.1 The CEE countries went through the transition from central planning to market economies, beginning with severe recessions, high inflation, and financial instability. In due course, the inflation rates came down and nominal interest rates declined. Public debt has been stabilized, though high and persistent deficits and the need for further fiscal adjustments are still critical issues in several cases. In the years to come, the new EU member states will face two principal challenges in formulating macroeconomic policies. The first is to manage the continued and likely rapid process of further real economic convergence, which will come with high real GDP and productivity growth rates, and large capital inflows. The second is to achieve the degree of nominal convergence required to enter into (the Third Stage of) European Economic and Monetary Union (EMU). These two challenges are not unrelated, as rapid growth and large capital inflows can make it more difficult to achieve nominal convergence, although, as we have argued (von Hagen and Traistaru-Siedschlag, 2006), there are good reasons to believe that real convergence would be easier to manage for some of the countries at least, if they were allowed to adopt the euro immediately. Both challenges relate mainly to...

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