The Pre-Crisis Capital Flow Surge to Emerging Europe : Did Countercyclical Fiscal Policy Make a Difference?

Author/Editor: Ruben Atoyan ; Dustin Smith ; Albert Jaeger
Publication Date: September 01, 2012
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: A push-pull-brake model of capital flows is used to study the effects of fiscal policy changes on private capital flows to emerging Europe during 2000-07. In the model, countercyclical fiscal policy has two opposing effects on capital inflows: (i) a conventional absorptionreducing effect, as a tighter fiscal stance acts as a brake on capital flows; and (ii) an unconventional absorption-boosting effect, as a tighter fiscal stance increases investor confidence in the country. The empirical results suggest that push factors (low returns in flow-originating countries), rather than pull factors (high returns in flow-destination countries), drove most of the private capital flows to emerging Europe. And active countercyclical fiscal policy once the fiscal stance is adjusted for the automatic effects on the fiscal position of both internal and external imbalances acted as a brake on capital inflows. However, the empirical results also suggest that, even abstracting from political feasibility and fiscal policy lag considerations, countercyclical fiscal policy alone is unlikely to be an effective policy tool to put an effective brake on sudden capital flow surges.
Series: Working Paper No. 12/222
Subject(s): Capital flows | Economic models | Emerging markets | Private capital flows

Author's Keyword(s): Capital flows | fiscal policy | absorption boom
Publication Date: September 01, 2012
ISBN/ISSN: 9781475510270/1018-5941 Format: Paper
Stock No: WPIEA2012222 Pages: 34
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