ab0cd Assessing macroeconomic vulnerability in central Europe by Libor Krkoska Abstract The central European transition-accession countries experienced several periods of macroeconomic vulnerability since the end of output declines in early 1990s. Some notable periods, which resulted in a necessity to implement extensive stabilisation measures, are March 1995 in Hungary, May 1997 in the Czech Republic, and September 1998 in the Slovak Republic. This paper shows that the standard early warning indicators provided useful information on macroeconomic vulnerability prior to the crises in central Europe, although this information had been mainly indicative; that is, early warning indicators would not have allowed one to predict the crises and their timing. In particular, the growing gap between current account deficit and foreign direct investment (FDI) in all the analysed countries provided clear early warning of subsequent economic turbulence. JEL classification: F30, O57, P27. Keywords: Macroeconomic vulnerability, currency crisis, early warning. Address for correspondence: Office of the Chief Economist, European Bank for Reconstruction and Development, One Exchange Square, London EC2A 2JN, United Kingdom. Telephone: +44 20 7338 6710; Fax: +44 20 7338 6110; e-mail:
[email protected] I would like to thank Nevila Konica and Peter Sanfey for many helpful comments. Numerous discussions with Julian Exeter on early warning systems for transition economies are gratefully acknowledged. The author is an Economist at the European Bank for Reconstruction and Development. The working paper series has been produced to stimulate debate on the economic transformation of central and eastern Europe and the CIS. Views presented are those of the authors and not necessarily of the EBRD.