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The author is Assistant Professor of Economics, University of Ancona (Italy); this paper was started while he was a Visiting Scholar at the Research Department of the IMF in November 1996. Useful comments from Alberto Bagnai, Fabrizio Coricelli, and Philippe Martin are gratefully acknowledged; Robert A. Feldman, David Bendor, Emmanuel van der Mensbrugghe, and other economists at the European Department of the IMF also provided valuable comments and information. Excellent research assistance by Mirko Lusetti is acknowledged.
Preliminary data seem to suggest that capital inflows in the some countries of region (e.g. the Czech Republic) might have declined in 1996 (see IMF, 1996, p. 38).
However, recall that in 1995 net capital inflows in Hungary and the Czech Republic are reported to have reached about 15 percent of GDP (IMF, 1996, p. 91).
Another reason to accumulate foreign exchange reserves is the need to meet large scheduled repayments of external debt (see Calvo and others, 1995, p. 17).
In early 1997, rumors of a new moratorium on foreign debt obligations by Bulgaria have intensified.
These two countries had not yet accepted, in late 1996, the obligations under article VIII of the IFM Articles of Agreements, that had been subscribed by the other eight CEECs.
“Dollarization” (the use of foreign currencies, mostly dollars, as domestic money) has been one of the early consequences of the removal of foreign exchange restrictions in transition economies; however, there is evidence that Dollarization has fallen where successful stabilization policies have been implemented (Sahay and Vegh, 1995).
The surge in capital inflows also poses a number of macro-economic and financial monitoring problems for the authorities in recipient countries: see, among other, Begg (1996), Calvo and others (1995), Ize (1996) and PSicklos (1996).
In principle, FDI are not involved when creditworthiness is at stake; however, direct investment is highly responsive to the reform climate and to privatizations in transition economies. See Chuhan and others (1993) on a distinction between the determinants of debt vis-a-vis non-debt capital inflows in Asia and Latin America.
We tried, however, to capture the change in external conditions in a very rough way (with a time-trend) but with no results.
Debelle and Faruqee (1996, p. 18-21) find that the fiscal surplus has a considerable (positive) impact on the current account.
Of course, this argument does not apply to foreign currency-denominated debt.
Throughout the paper, we use data on net foreign debt stocks (gross debt less foreign exchange reserves).
This can also be true of other bilateral or multilateral official lending on which, however, we could not find complete and consistent data.
See Nerlove and Balestra (1992). Notice also that no lagged dependent variable is present on the right-hand-side of our regressions, so that a potential source of inconsistency of the fixed-effects OLS estimator is absent (Debelle-Faruqee, 1996, p. 11).
It should be mentioned that, given the still unsatisfactory quality of the statistics on transition economies, measurement errors may affect the estimates.
Following Begg (1996, p. 75) we have tested whether the rate of change of the real exchange rate matters for net foreign borrowing in CEECs. The parameter is never significant at the 10 percent level.
It is true that fiscal discipline could be relaxed in the presence of large financial inflows, and that net borrowing contributes to the rise of foreign debt, but we do not think that reverse causation is really a severe problem in these cases.
Fischer and others (1996) find that the CLI is a good explanatory variable for growth in transition countries.
The actual value over 1993-95 in the case of Slovakia and the Baltics.