## Finance and Convergence: What’s Ahead for Emerging Europe?

_IMF Working Papers, November 12, 2007_

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**Canonical URL:** [Finance and Convergence: What’s Ahead for Emerging Europe?](https://www.imf.org/en/publications/wp/issues/2016/12/31/finance-and-convergence-whats-ahead-for-emerging-europe-21406)

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## Bibliographic details
- Authors: Philip Schellekens, Rudolfs Bems
- Published: November 12, 2007
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451868074.001

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### Overview
- Paper singles out the key short-term risks and medium-term challenges related to finance and convergence in emerging Europe.
- Uses a general equilibrium theoretical framework to identify pragmatic directions for policymakers.
- Emphasizes that while "speed limits" to capital inflows may be hard to determine, the costs of breaking them are likely substantial.
- Highlights the need to prepare for "the curve ahead"—the reversal of external current account imbalances—and the importance of flexible factor markets and strong financial systems to avoid painful adjustments.

### Key findings and diagnostic insights
- Short-term risks and medium-term challenges are centered on capital inflows, current account deficits, and financial-sector vulnerabilities.
- The costs of exceeding the economy's "speed limits" to capital inflows are likely substantial.
- Preparing for reversals of external current account imbalances is crucial; such reversals are a central risk for emerging Europe.
- Flexible factor markets and strong financial systems are identified as critical for cushioning adjustment when external imbalances reverse.

### Policy recommendations and pragmatic directions
- Build buffers and reduce vulnerabilities to ensure "safe driving" amid capital inflows.
- Prepare proactively for the reversal of external current account imbalances ("the curve ahead") to avoid painful adjustments.
- Strengthen flexibility in factor markets.
- Reinforce financial system resilience.

### Analytical framework and scope
- Methodology: general equilibrium theoretical framework applied to issues of finance and convergence in emerging Europe.
- Subject areas explicitly identified: Capital inflows, Consumption, Credit, Current account deficits, Productivity.
- Keywords provided: current account, interest rate, open economy, WP.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/finance-and-convergence-whats-ahead-for-emerging-europe-21406_