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

By Ruben V Atoyan, Dustin Smith, Albert Jaeger

September 1, 2012

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Ruben V Atoyan, Dustin Smith, and Albert Jaeger. The Pre-Crisis Capital Flow Surge to Emerging Europe: Did Countercyclical Fiscal Policy Make a Difference?, (USA: International Monetary Fund, 2012) accessed November 8, 2024

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.

Subject: Balance of payments, Capital flows, Capital inflows, Fiscal policy, Fiscal stance, Output gap, Production

Keywords: Absorption boom, Capital flows, Capital inflows, Countercyclical fiscal policy, Country dummy, EU accession process, Europe, Europe country, Exchange rate, Financial crisis, Fiscal policy, Fiscal policy stance, Fiscal stance, Global, Investment climate, Output gap, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/222
Stock No:

WPIEA2012222
ISBN:

9781475510270
ISSN:

1018-5941

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