10/2016 Karsten Staehr. Capital Flows and Growth Dynamics in Central and Eastern Europe


This paper assesses the importance of capital flows as measured by the current account balance for the growth dynamics of the EU countries from Central and Eastern Europe. Economic growth in these countries was on average relatively high before the global financial crisis but markedly lower after the crisis. Panel data econometrics using annual data for 1997–2015 points to the contemporaneous current account balance having a sizeable negative effect on annual GDP growth. Estimations using many control variables and instrumental variables suggest that the negative effect is mainly demand driven. Counterfactual simulations show that growth rates in all CEE countries would have been lower in the absence of capital flows, and this applies particularly to the countries with the most disadvantageous starting points.

JEL Codes: P17, P21, P36

DOI: 10.23656/25045520/102016/0037

Keywords: business cycles, output performance, capital flows, current account balance, transition economies

Corresponding author’s e-mail address: karsten.staehr [at] ttu.ee, karsten.staehr [at] eestipank.ee

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The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank or other part of the Eurosystem.