Catching-up Strategies in CESEE Economies
Edited by Ewald Nowotny, Peter Mooslechner and Doris Ritzberger-Grünwald
Chapter 11: Monetary Policy Challenges in the CESEE Region: Architecture for an Earthquake Zone
1 Bas B. Bakker and Leslie Lipschitz In 2002, one of the present authors was talking repeatedly in Europe about the imminence of potentially overwhelming capital flows to the newly emerging market economies, about the criticality of risk pricing and the complications from seemingly erratic risk premia, and about the impossible dilemmas for monetary policy. At one seminar – at the ECB – he described the challenge for monetary policy as being akin to that of architecture in an earthquake zone. At the time he was chastised for being alarmist. Others said there was little evidence of such problematic capital flows. His response at the time was: ‘Just wait and watch.’ In 2006, the other author warned that large capital inflows into emerging Europe were generating imbalances and vulnerabilities similar to those seen in emerging Asia prior to the Asian crisis. He was told not to worry: ‘Europe was different’, capital flowing from rich to poor countries should be celebrated rather than be worried about, and the risk of a sudden stop in capital flows was very small.2 Before embarking on prescriptions it is helpful to undertake a diagnostic review of the recent history – a sort of ex post waiting and watching. The review below is conducted with a very broad brush. The objective is to cull useful generalizations, not to cover all the particulars of the individual economies. Clearly, of course, our appreciation of this history is influenced strongly by our earlier writing on the economic mechanisms at work. THE HISTORY:...
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