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Home arrow Political science arrow A New Model for Balanced Growth and Convergence: Achieving Economic Sustainability in CESEE Countries

Managing capital flows in a globalized economy

INTRODUCTION

The purpose of this chapter is to analyse the phenomenon of the increasing size and volatility of private capital flows since the 1990s and to assess the underlying causes and resulting consequences for macroeconomic policy-making at both a national and a global level. Special attention will be devoted to emerging-market economies of Central and Eastern Europe and the former USSR, but most of our findings and conclusions also apply to other emerging regions. After a brief analysis of the dynamics of capital flows in the 1990s and 2000s and the determining factors we will turn to two important and sensitive areas of macroeconomic management: balance of payments (BoP) policy and monetary policy. Free capital mobility has dramatically narrowed the room for manoeuvre of national policies in both areas, especially in small open economies, which is not always well understood by both policy-makers and analysts. This makes a strong case for supranational macroeconomic policy coordination, especially in the area of monetary policy. However, such coordination seems to be still a distant prospect, as several conceptual questions and political obstacles need to be solved first.

 
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