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Portfolio and short-term capital inflows to the new and potential EU countries: Patterns, determinants and policy responses

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  • PIROVANO Mara
  • VANNESTE, Jacques
  • VAN POECK, André

Abstract

In this paper we estimate a dynamic panel model (Arellano-Bond GMM) explaining the volume of portfolio and short-term capital inflows (predominantly bank loans) in the new and potential EU member States as a function of a set of variables representing macroeconomic fundamentals (both domestic and foreign), macroeconomic policies and development of the financial sector. We find that while inflows of short-term bank loans are significantly explained by macroeconomic factors, exchange rate regime and liquidity of the banking sector, portfolio inflows seem to be meaningfully influenced only by the level of foreign GDP. We suggest two explanations for the latter result. First, the inability of aggregate data to capture the risk and expected profitability dimensions that typically underlie portfolio decisions. Second, portfolio capital in the form of bonds might react to interest rates other than the domestic and the European ones. During the last decade, the volume of short-term capital in the form of bank loans to the New and potential member States increased (with some heterogeneity across countries). In light of the econometric results, their vulnerability to reversals could be mitigated by adequate macroeconomic policies and further improvement of their financial sector.

Suggested Citation

  • PIROVANO Mara & VANNESTE, Jacques & VAN POECK, André, 2009. "Portfolio and short-term capital inflows to the new and potential EU countries: Patterns, determinants and policy responses," Working Papers 2009018, University of Antwerp, Faculty of Business and Economics.
    • Handle: RePEc:ant:wpaper:2009018
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    References listed on IDEAS

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    2. Pirovano, Mara, 2012. "Monetary policy and stock prices in small open economies: Empirical evidence for the new EU member states," Economic Systems, Elsevier, vol. 36(3), pages 372-390.

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    More about this item

    Keywords

    Capital inflows; EU enlargement; Policy responses; Portfolio investment; Dynamic panel estimation;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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