, Volume 42, Issue 3, pp 643–672 | Cite as

Financial integration, push factors and volatility of capital flows: evidence from EU new member states

  • Tomislav Globan
Original Paper


Due to the recent financial crisis and ensuing sudden stop episodes, the question whether capital inflows are dominated by push or pull factors has become an extremely important policy question in small, open and integrated economies. The aim of this paper is to empirically measure, in a methodologically innovative manner, the extent to which the movement of capital inflows in the non-eurozone European Union new member states (EU NMS) has been determined by domestic and external factors and discuss potential consequences of such trends, thereby filling the existing literature gap, i.e. the lack of empirical papers that systematically model the temporal dynamics of capital flow determinants. The paper uses econometric methods, i.e. historical decomposition from a structural vector autoregression model, to examine the temporal dynamics of capital flow determinants and extract components of capital inflows in non-eurozone EU NMS that are influenced by domestic and foreign shocks separately. Econometric analysis confirmed the hypothesis that macroeconomic factors in the eurozone are becoming increasingly dominant determinants of capital inflows in EU NMS, especially after the EU accession, and proved that these trends can be connected to rising financial integration levels of analysed countries. Furthermore, results suggest that the rising influence of push factors can be connected with the higher volatility of capital inflows, thus making host countries more prone to sudden stop episodes. The paper uncovers several non-negligible macroeconomic risks of large capital inflows determined by push factors for domestic economic authorities in small integrated economies and points out the need to make efforts to strengthen the domestic financial and regulatory system to ensure the capability of these economies in efficiently managing capital inflows.

Keywords Capital flows determinants  Volatility Push and pull factors SVAR model EU new member states Financial integration 


  1. Agénor PR (1998) The surge in capital flows: analysis of ‘pull’ and ‘push’ factors. Int J Financ Econ 3:39–57CrossRefGoogle Scholar
  2. Ahmed S, Park JH (1994) Sources of macroeconomic fluctuations in small open economies. J Macroecon 16(1):1–36CrossRefGoogle Scholar
  3. Ahmed S, Ickes BW, Wang P, Yoo BS (1993) International business cycles. Am Econ Rev 83(3):335–359Google Scholar
  4. Aizenman J, Chinn MD, Ito H (2010) The emerging global financial architecture: tracing and evaluating the new patterns of the Trilemma’s configurations. J Int Money Financ 29(4):615–641CrossRefGoogle Scholar
  5. Aristovnik A (2008) Short-term determinants of current account deficits—evidence from Eastern Europe and the former Soviet Union. East Eur Econ 46(1):24–42CrossRefGoogle Scholar
  6. Aristovnik A (2013) Twin deficits and the Feldstein–Horioka puzzle: a comparison of the EU member states and candidate countries. Actual Probl Econ 143(5):205–214Google Scholar
  7. Atoyan R, Jaeger A, Smith D (2012) The pre-crisis capital flow surge to emerging Europe: did countercyclical fiscal policy make a difference? IMF working paper 12/222Google Scholar
  8. Babetskii I, Komárek L, Komárková Z (2007) Financial Integration of Stock Markets among New EU Member States and the Euro Area. Financ úvěr Czech J Econ Financ 57(7–8):341–362Google Scholar
  9. Baker S, Bloom N, Davis S (2013) Measuring economic policy uncertainty. Chicago booth research paper 13-02Google Scholar
  10. Bayoumi T, Eichengreen B (1994) Macroeconomic adjustment under Bretton Woods and the post-Bretton Woods float: an impulse-responses analysis. Econ J 104(425):813–827CrossRefGoogle Scholar
  11. Blanchard O, Quah D (1989) The dynamic effects of aggregate supply and demand disturbances. Am Econ Rev 79(4):655–673Google Scholar
  12. Byrne JP, Fiess N (2011) International capital flows to emerging and developing countries: national and global determinants. Discuss Pap Scott Inst Res Econ 3(2011–03).
  13. Calvo GA, Leiderman L, Reinhart CM (1993) Capital inflows and real exchange rate appreciation in Latin America. IMF Staff Pap 40(1):109–151Google Scholar
  14. Calvo GA, Leiderman L, Reinhart CM (1996) Inflows of capital to developing countries in the 1990s. J Econ Perspect 10(2):123–139CrossRefGoogle Scholar
  15. Chinn MD, Ito H (2006) What matters for financial development? Capital controls, institutions, and interactions. J Dev Econ 81(1):163–192CrossRefGoogle Scholar
  16. Chinn MD, Ito H (2008) A new measure of financial openness. J Comp Policy Anal 10(3):309–322Google Scholar
  17. Chinn MD, Ito H (2013) The Chinn–Ito index—a de jure measure of financial openness. (Accessed 4 Feb 2014)
  18. Christiano L, Eichenbaum M, Vigfusson R (2003) What happens after a technology shock? NBER working paper 9819Google Scholar
  19. Chuhan P, Claessens S, Mamingi N (1993) Equity and bond flows to Asia and Latin America: the role of global and country factors. World Bank working paper series 1160Google Scholar
  20. Clarida R, Gali J (1994) Sources of real exchange rate fluctuations: how important are nominal shocks? Carnegie–Rochester Conf Ser Public Policy 41:1–56CrossRefGoogle Scholar
  21. De Vita G, Kyaw KS (2008) Determinants of capital flows to developing countries: a structural VAR analysis. J Econ Stud 35(4):304–322CrossRefGoogle Scholar
  22. Doan TA (2013) RATS handbook for vector autoregressions. (Accessed 17 Sept 2013)
  23. Dooley MP, Fernández-Arias E, Kletzer KM (1996) Is the debt crisis history? Recent private capital inflows to developing countries. World Bank Econ Rev 10(1):27–50CrossRefGoogle Scholar
  24. Enders W (2010) Applied econometric time series. Wiley, HobokenGoogle Scholar
  25. Fernald JG (2007) Trend breaks, long-run restrictions, and contractionary technology improvements. J Monet Econ 54(8):2467–2485CrossRefGoogle Scholar
  26. Fernández-Arias E (1996) The new wave of private capital inflows: push or pull? J Dev Econ 48:389–418CrossRefGoogle Scholar
  27. Forbes KJ, Warnock FE (2011) Capital flow waves: surges, stops, flight, and retrenchment. NBER working paper 17351Google Scholar
  28. Francis N, Ramey VA (2005) Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited. J Monet Econ 52(8):1379–1399CrossRefGoogle Scholar
  29. Fratzscher M (2012) Capital flows, push versus pull factors and the global financial crisis. J Int Econ 88(2):341–356CrossRefGoogle Scholar
  30. Galí J (1999) Technology, employment, and the business cycle: do technology shocks explain aggregate fluctuations? Am Econ Rev 89(1):249–271CrossRefGoogle Scholar
  31. Gavin M, Hausmann R, Leiderman L (1995) The macroeconomics of capital flows to Latin America: experience and policy issues. Int-Am development bank working paper 310Google Scholar
  32. Glick R, Rogoff K (1995) Global versus country-specific productivity shocks and the current account. J Monet Econ 35(1):159–192CrossRefGoogle Scholar
  33. Hegerty SW (2009) Capital flows to transition economies: what is the role of external shocks? Econ Bull 29(2):1345–1358Google Scholar
  34. Hernández L, Mellado P, Valdés R (2001) Determinants of private capital flows in the 1970s and 1990s: is there evidence of contagion? IMF working paper 01/64Google Scholar
  35. International Monetary Fund (2011) World economic outlook April 2011. International Monetary Fund, Washington DCGoogle Scholar
  36. International Monetary Fund (2012) The liberalization and management of capital flows: an institutional view. International Monetary Fund, Washington, DCGoogle Scholar
  37. Jevčák A, Setzer R, Suardi M (2010) Determinants of capital flows to the new EU member states before and during the financial crisis. European Commission economic paper 425Google Scholar
  38. Kalemli-Ozcan S, Reshef A, Sørensen BE, Yosha O (2006) why does capital flow to rich states? CEPR discuss paper 5635Google Scholar
  39. Ketenci N (2012) The Feldstein–Horioka puzzle and structural breaks: evidence from EU members. Econ Model 29(2):262–270CrossRefGoogle Scholar
  40. Kim Y (1996) Income effects on the trade balance. Rev Stat Econ 78(3):464–469CrossRefGoogle Scholar
  41. Kim Y (2000) Causes of capital flows in developing countries. J Int Money Financ 19:235–253CrossRefGoogle Scholar
  42. Kučerová Z (2009) Measuring financial integration in Central Europe through international investment positions. East Eur Econ 47(4):25–41CrossRefGoogle Scholar
  43. Lane PR, Milesi-Ferretti GM (2007) Capital flows to central and Eastern Europe. Emerg Mark Rev 8(2):106–123CrossRefGoogle Scholar
  44. Lütkepohl H (2011) Vector autoregressive models. European University Institute, FlorenceCrossRefGoogle Scholar
  45. Mody A, Taylor MP, Kim JY (2001) Modelling fundamentals for forecasting capital flows to emerging markets. Int J Financ Econ 6:201–216CrossRefGoogle Scholar
  46. Montiel PJ, Reinhart C (1999) Do capital controls and macroeconomic policies influence the volume and composition of capital flows? Evidence from the 1990s. J Int Money Financ 18:619–635CrossRefGoogle Scholar
  47. Ötker-Robe I, Polański Z, Topf B, Vávra D (2007) Coping with capital inflows: experiences of selected european countries. IMF working paper 190Google Scholar
  48. Schmitz M (2011) Financial reforms and capital flows to emerging Europe. Empirica 38:579–605CrossRefGoogle Scholar
  49. Syllignakis MN, Kouretas GP (2010) German, US and Central and Eastern European stock market integration. Open Econ Rev 21(4):607–628CrossRefGoogle Scholar
  50. Taylor MP, Sarno L (1997) Capital flows to developing countries: long- and short-term determinants. World Bank Econ Rev 11(3):451–470CrossRefGoogle Scholar
  51. Wagner H, Berger W (2004) Globalization, financial volatility and monetary policy. Empirica 31:163–184CrossRefGoogle Scholar
  52. Ying YH, Kim Y (2001) An empirical analysis on capital flows: the case of Korea and Mexico. South Econ J 67(4):954–968CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Faculty of Economics and BusinessUniversity of ZagrebZagrebCroatia

Personalised recommendations