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Capital flows to transition economies: what is the role of external shocks?


  • Scott W Hegerty

    () (Canisius College)


During the recent international financial crisis, capital flows into Central and Eastern European transition economies have faced a serious threat of a “sudden stop.” But the specific dangers depend on these flows` macroeconomic determinants, which can be ambiguous because the underlying savings and investment decisions can vary depending upon the persistence of income shocks. This study applies VAR methodologies to examine the relative influences of foreign and domestic income growth on the capital accounts of six countries that have recently joined the European Union. Impulse response functions show that Bulgaria, the Czech Republic, and Lithuania are influenced more strongly by foreign shocks, while Latvia, Estonia, and Romania show more of a response to domestic shocks. As a result, these three countries—and Latvia in particular—show a vulnerability to a "sudden stop" if they experience localized recessions.

Suggested Citation

  • Scott W Hegerty, 2009. "Capital flows to transition economies: what is the role of external shocks?," Economics Bulletin, AccessEcon, vol. 29(2), pages 1345-1358.
  • Handle: RePEc:ebl:ecbull:eb-09-00167

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    References listed on IDEAS

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    Cited by:

    1. Yusuf Ekrem Akbas & Mehmet Senturk & Canan Sancar, 2013. "Testing for Causality between the Foreign Direct Investment, Current Account Deficit, GDP and Total Credit: Evidence from G7," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 60(6), pages 791-812, December.
    2. Scott W. Hegerty, 2011. "Capital Flows to Russia, Ukraine, and Belarus: Does "Hot" Money Respond Differently to Macroeconomic Shocks?," New York Economic Review, New York State Economics Association (NYSEA), pages 47-62.
    3. Tomislav Globan, 2015. "Financial integration, push factors and volatility of capital flows: evidence from EU new member states," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 42(3), pages 643-672, August.

    More about this item


    Capital inflows; Transition economies; Macroeconomic determinants; Sudden stops;

    JEL classification:

    • F3 - International Economics - - International Finance


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