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Testing the 'trilemma' in post-transition Europe - a new empirical measure of capital mobility


  • Tomislav Globan


This article develops a new empirical measure of capital mobility. It tests the hypothesis that the degree of capital mobility can be estimated by measuring the reaction intensity of capital flows to shocks in interest rates on a sample of eight European post-transition economies. This hypothesis can be derived from the Mundell-Fleming open economy model, the implications of which are essentially based on the assumption of a close link between the degree of capital mobility in a country and the reaction of its capital flows to changes in domestic and external interest rates. Precisely because of this interrelationship, policy makers, in theory, face the policy 'trilemma' or the 'impossible trinity', i.e. the inability to achieve the following three objectives simultaneously - a stable exchange rate, financial openness and an independent monetary policy. Using impulse response and historical decomposition analysis in a VAR framework, the results show a significant increase in the explanatory power of interest rates for the movement of capital flows shortly before and after the accession of post-transition economies to the European Union. On the other hand, the recent financial crisis made capital flows less sensitive to interest rates owing to increased risk aversion on international capital markets. Results suggest that the degree of capital mobility, i.e. the level of financial integration with EU-15, is highest in Bulgaria, Latvia and Lithuania and least pronounced in Poland and Croatia. Results are verified by a number of robustness checks, with three separate alternative measures of capital mobility confirming the results obtained from the econometric model.

Suggested Citation

  • Tomislav Globan, 2014. "Testing the 'trilemma' in post-transition Europe - a new empirical measure of capital mobility," Post-Communist Economies, Taylor & Francis Journals, vol. 26(4), pages 459-476, December.
  • Handle: RePEc:taf:pocoec:v:26:y:2014:i:4:p:459-476 DOI: 10.1080/14631377.2014.964459

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    References listed on IDEAS

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    Cited by:

    1. Mandilaras, Alex S., 2015. "The international policy trilemma in the post-Bretton Woods era," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 18-32.
    2. Tomislav Globan & Petar Sorić, 2017. "Financial integration before and after the crisis: Euler equations (re)visit European Union," EFZG Working Papers Series 1702, Faculty of Economics and Business, University of Zagreb.
    3. Ines Kersan Škabiæ, 2016. "Empirical Evidence of Capital Mobility in the EU New Member States," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 19(SCI), pages 29-42, December.

    More about this item

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration


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