CAPITAL FLOWS AND SPECULATIVE ATTACKS IN PROSPECTIVE EU MEMBER STATES
Heather D Gibson
Bank of Greece, Economic Research Department
Euclid Tsakalotos
Athens University of Economics and Business
ABSTRACT
This paper examines the capital flow experience of transition economies who are also prospective EU members with a view to shedding light on the likely problems they might encounter with exchange rate policy in the run up to euro area membership. We show that they have been experiencing fairly sizeable capital flows since the early 1990s. We explain these flows using two separate models. The first explains the level of capital flows using panel data from the prospective EU members. The second concentrates specifically on estimating the probability of a country experiencing downward speculative pressure. In both cases, the contribution of domestic factors and contagion is explored. The results suggest that while domestic factors have some role to play, it is rather limited. Moreover there is clear evidence of contagion effects, suggesting that macroeconomic policy in the prospective EU members will be complicated by capital flows in the run up to euro area membership.
Keywords: capital flows, transition economies, accession countries and EU membership.
JEL classification: F32, F36, P20
Acknowledgements: An earlier version of this paper was presented at the CES-ifo conference “Managing EU Enlargement” in Munich, December 2001. We would like to thank participants at the conference, George Tavlas and two anonymous referees for their comments on the paper.
Heather D Gibson,
Economic Research Department,
Bank of Greece, 21 E. Venizelos Av.,
102 50 Athens, Greece,
Tel. + 30 210 3235803
Email: hgibson@bankofgreece.gr