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Volume 65, Issue 4

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From Financial Integration to Sudden Stops? New Evidence from EU Transition Countries

Globan, Tomislav

Year: 2015   Volume: 65   Issue: 4   Pages: 336-359

Abstract: This paper examines the temporal dynamics of the relationship between real and financial determinants of capital inflows and attempts to explain the background of the recent great sudden stop episode in EU transition countries. Using historical decomposition in a structural vector autoregression framework, we find that the major pre-crisis surge in capital inflows to EU transition countries coincides with a strong increase in correlation between the financial component and observed capital inflows. The consequences of these trends have been reflected in the high volatility of capital inflows and their retrenchment during the financial crisis. Analysis further shows that almost all sudden stop episodes in EU transition countries have been characterized by sudden increases in the volatility of financial components of capital inflows. Results are robust to various model specifications and different subcategories of capital inflows.

JEL classification: F21, F32, F36

Keywords: capital inflows, EU transition countries, financial and real shocks, financial integration, sudden stops

RePEc: http://ideas.repec.org/a/fau/fauart/v65y2015i4p336-359.html

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