Capital Inflows and Convertibility in the Transforming Economies of Central Europe

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Book Chapter

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Central European transforming economies have all experienced considerable capital inflows once their initial inflation shock expired and their national income started to grow. These capital inflows are induced by both domestic and external economy conditions. The economic reforms in these countries have increased demand for money and have improved productivity. These improvements in domestic economy conditions have invited capital inflows from abroad. In addition, international interest rates have been falling since 1994, which promoted capital allocations in Central European countries still perceived as emerging market economies by international capital investors.

This study focuses on the principal causes of capital inflows and on the economic consequences of possible sterilising actions. It is not aimed at reporting or examining in detail sterilisation operations of individual central banks. Rather, it intends to alert monetary authorities in transforming economies about possible economic consequences of large capital inflows and various tools of their sterilisation. The role of external factors is emphasised and the dangers of reversed capital outflows are discussed.


Part of the Studies in Economic Transition book series.