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Capital flows and the boom-bust cycle: The case of Estonia

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  • Brixiova, Zuzana
  • Vartia, Laura
  • Wörgötter, Andreas

Abstract

During 2000-2007, Estonia was among the fastest growing emerging market economies, but in late-2008 entered a deep recession. This paper examines shocks, institutions, and policies that have made Estonia's boom-bust cycle so severe. It finds that an open capital account, the prospect for EU entry, and the currency board facilitated massive capital inflows, which led to credit and real estate booms. In late-2008 a domestic slowdown was greatly amplified by the global financial and economic crisis. To resume sustainable growth, the country will need to regain competitiveness and rebalance resources to exports. Estonia's experience underscores the importance for other emerging market economies to retain some flexibility in their macroeconomic frameworks and approach capital account liberalization cautiously.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 34 (2010)
Issue (Month): 1 (March)
Pages: 55-72

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Handle: RePEc:eee:ecosys:v:34:y:2010:i:1:p:55-72

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Keywords: Capital flows Boom-bust cycle Global financial and economic crisis Estonia;

References

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Citations

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Cited by:
  1. Jarko Fidrmuc & Caroline Klein & Robert Price & Andreas Wörgötter, 2013. "Slovakia: A Catching Up Euro Area Member In and Out of the Crisis," OECD Economics Department Working Papers 1019, OECD Publishing.
  2. Insel, Aysu & Korkmaz, Abdurrahman, 2010. "The contagion effect: evidences from former Soviet Economies in Eastern Europe," MPRA Paper 24999, University Library of Munich, Germany.
  3. Antje Hildebrandt & Katharina Steiner & Karin Wagner & Reiner Martin, 2012. "Residential Property Markets in CESEE EU Member States," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 8-30, February.
  4. Salvatore Dell’Erba & Dennis Reinhardt, 2011. "Surfing the Capital Waves: A sector-level examination of surges in FDI inflows," Working Papers 11.07, Swiss National Bank, Study Center Gerzensee.
  5. Jarko Fidrmuc & Reiner Martin, 2011. "FDI, Trade and Growth in CESEE Countries," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 70-89.
  6. Ponomarenko, Alexey, 2012. "Early warning indicators of asset price boom/bust cycles in emerging markets," BOFIT Discussion Papers 22/2012, Bank of Finland, Institute for Economies in Transition.
  7. Agnieszka Stążka-Gawrysiak, 2011. "Poland on the road to the euro: How serious is the risk of boom-bust cycles after the euro adoption? An empirical analysis," National Bank of Poland Working Papers 103, National Bank of Poland, Economic Institute.
  8. Schrader, Klaus & Laaser, Claus-Friedrich, 2010. "Tiger oder Bettvorleger? Die baltischen Staaten nach der Krise," Kiel Discussion Papers 485, Kiel Institute for the World Economy (IfW).
  9. Zuzana Brixiova & Margaret H. Morgan & Andreas Wörgötter, 2010. "On The Road to Euro: How Synchronized Is Estonia with the Euro zone?," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 7(1), pages 203-227, June.

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