European Commission Directorate-General for Economic and Financial Affairs Capital flows to converging European economies – from boom to drought and beyond Proceedings to the workshop held on 1 October 2010 EUROPEAN ECONOMY Occasional Papers No 75 TABLE OF CONTENT Introduction .............................................................................................................................................................................. 4 BACKGROUND AND THE MAIN CONCLUSIONS OF THE WORKSHOP.......................................................................... 4 SELECTED PAPERS............................................................................................................................................................ 5 DETERMINANTS OF CAPITAL FLOWS TO CEE COUNTRIES .................................................................................... 5 THE ROLE OF BANKS IN CHANNELING CAPITAL FLOWS TO CEE COUNTRIES .................................................... 5 Determinants of capital flows to the new EU Member States before and during the financial crisis .............................. 7 1. INTRODUCTION............................................................................................................................................................... 8 2. HISTORICAL EVOLUTION AND COMPOSITION OF CAPITAL FLOWS TO THE NMS10............................................. 9 3. CAPITAL FLOWS DURING THE FINANCIAL CRISIS PERIOD .................................................................................... 13 4. DETERMINATS OF CAPITAL FLOWS........................................................................................................................... 16 4.1 EXTERNAL VERSUS INTERNAL DETERMINANTS.............................................................................................. 16 4.2 EXTERNAL DETERMINANTS OF CAPITAL FLOWS............................................................................................. 18 4.3 COUNTRY-SPECIFIC DETERMINANTS................................................................................................................ 26 5. CONCLUSION ................................................................................................................................................................ 29 REFERENCES.................................................................................................................................................................... 30 APPENDIX: COUNTRY-SPECIFIC COMPONENTS AND DATA SOURCES.................................................................... 32 Capital flows to converging European economies: crises, reforms and FDI................................................................... 33 1. INTRODUCTION............................................................................................................................................................. 34 2. CONCEPTUAL FRAMEWORK....................................................................................................................................... 35 3. DATA AND METHODOLOGY........................................................................................................................................ 37 3.1 DATA ....................................................................................................................................................................... 37 3.2 ECONOMETRIC METHODOLOGY......................................................................................................................... 39 4. ECONOMETRIC RESULTS............................................................................................................................................ 40 4.1 BASELINE RESULTS.............................................................................................................................................. 40 4.2 WHAT ROLE FOR CRISES AND REFORMS?....................................................................................................... 41 5. CONCLUSIONS.............................................................................................................................................................. 43 REFERENCES.................................................................................................................................................................... 44 The dynamics of portfolio holdings in Emerging Europe .................................................................................................. 66 1. INTRODUCTION............................................................................................................................................................. 67 2. EMPIRICAL SETUP........................................................................................................................................................ 68 2.1 THE PRE-CRISIS PERIOD ..................................................................................................................................... 68 2.2 THE CRISIS PERIOD.............................................................................................................................................. 69 3. DATA............................................................................................................................................................................... 69 4. EMPIRICAL RESULTS ................................................................................................................................................... 70 4.1 STYLIZED FACTS................................................................................................................................................... 70 4.2 PANEL ESTIMSTES: THE PRE-CRISIS PERIOD .................................................................................................. 75 4.3 CROSS-SECTION ESTIMATES: THE CRISIS PERIOD......................................................................................... 76 5. CONCLUSIONS.............................................................................................................................................................. 79 REFERENCES.................................................................................................................................................................... 80 The determinants of cross-border bank flows to emerging markets: new empirical evidence on the spread of financial crises ....................................................................................................................................................................... 82 1 INTRODUCTION.............................................................................................................................................................. 83 2. STYLIZED FACTS ON CROSS-BORDER BANK FLOWS TO EMERGING MARKETS................................................ 84 3. CROSS-BORDER BANK FLOWS AND FINANCIAL CRISES: A LITERATURE REVIEW............................................. 86 4. ECONOMETRIC ESTIMATES........................................................................................................................................ 87 4.1 EMPIRICAL MODEL................................................................................................................................................ 87 4.2 ESTIMATION RESULTS ......................................................................................................................................... 90 4.3 CONTRIBUTION ANALYSIS................................................................................................................................... 93 5. ROBUSTNESS CHECKS ............................................................................................................................................... 95 5.1 ECONOMETRIC OPTIONS..................................................................................................................................... 96 5.2 FINANCIAL CENTRES EFFECT............................................................................................................................. 96 5.3 COUNTRY-SPECIFIC RISK FACTORS: AN EXTENDED ANALYSIS.................................................................... 96 2 5.4 REGIONAL SAMPLES ............................................................................................................................................ 97 5.5 DIFFERENT CRISIS PERIODS............................................................................................................................... 98 6. CONCLUSIONS............................................................................................................................................................. 98 APPENDIX........................................................................................................................................................................ 100 REFERENCES.................................................................................................................................................................. 109 Cross-border flows and foreign banks in the global financial crisis – has Eastern Europe been different?............ 112 1. INTRODUCTION........................................................................................................................................................... 113 2. FOREIGN BANKS AND CROSS-BORDER