The Pre-Crisis Capital Flow Surge to Emerging Europe: Did Countercyclical Fiscal Policy Make a Difference?
IMF Working Papers, September 1, 2012
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Bibliographic details
- Authors: Ruben V Atoyan, Dustin Smith, Albert Jaeger
- Published: September 1, 2012
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475510270.001
Study overview
- Authors: Ruben V Atoyan, Dustin Smith, Albert Jaeger
- Date: September 1, 2012
- Series: Working Paper No. 2012/222, Issue: 222, Volume: 2012, Pages: 34
- DOI: https://doi.org/10.5089/9781475510270.001
- ISBN: 9781475510270
- ISSN: 1018-5941
- Subject keywords: Balance of payments; Capital flows; Capital inflows; Fiscal policy; Fiscal stance; Output gap; Production; absorption boom; countercyclical fiscal policy; EU accession process; exchange rate; financial crisis; investment climate; WP
Model and methodology
- Model used: push-pull-brake model of capital flows.
- Sample period: 2000-07.
- Mechanisms in the model:
- Push effects: factors in flow-originating countries (e.g., low returns) that drive outflows.
- Pull effects: factors in flow-destination countries (e.g., high returns) that attract inflows.
- Brake mechanism: countercyclical fiscal policy influences capital flows through two opposing channels:
- (i) Conventional absorption-reducing effect: a tighter fiscal stance acts as a brake on capital flows.
- (ii) Unconventional absorption-boosting effect: a tighter fiscal stance increases investor confidence in the country.
Key empirical findings
- Primary driver of private capital flows to emerging Europe:
- Push factors (low returns in flow-originating countries) drove most of the private capital flows to emerging Europe during 2000-07, rather than pull factors (high returns in flow-destination countries).
- Effect of countercyclical fiscal policy:
- 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.
- Despite the braking effect, the empirical results suggest that countercyclical fiscal policy alone is unlikely to be an effective policy tool to put an effective brake on sudden capital flow surges, even abstracting from political feasibility and fiscal policy lag considerations.
Policy implications and considerations
- Countercyclical fiscal policy can reduce capital inflows by reducing domestic absorption after adjusting the fiscal stance for automatic effects tied to internal and external imbalances.
- The confidence-enhancing (absorption-boosting) channel of tighter fiscal stances implies a trade-off: fiscal tightening may simultaneously dampen absorption and improve investor confidence.
- Given the limited effectiveness of countercyclical fiscal policy alone in halting sudden capital flow surges, policymakers should consider complementary measures beyond fiscal stance adjustments (recognizing that this study abstracts from political feasibility and fiscal policy lags).
Source: IMF Working Paper "The Pre-Crisis Capital Flow Surge to Emerging Europe: Did Countercyclical Fiscal Policy Make a Difference?" (Working Paper No. 2012/222) by Ruben V Atoyan, Dustin Smith, Albert Jaeger, September 1, 2012.