Finance and Convergence: What’s Ahead for Emerging Europe?

IMF Working Papers, November 12, 2007

Source details

Paper singles out the key short-term risks and medium-term challenges related to finance and convergence in emerging Europe.
Uses a general equilibrium theoretical framework to identify pragmatic directions for policymakers.
Emphasizes that while "speed limits" to capital inflows may be hard to determine, the costs of breaking them are likely substantial.
Highlights the need to prepare for "the curve ahead"—the reversal of external current account imbalances—and the importance of flexible factor markets and strong financial systems to avoid painful adjustments.

Short-term risks and medium-term challenges are centered on capital inflows, current account deficits, and financial-sector vulnerabilities.
The costs of exceeding the economy's "speed limits" to capital inflows are likely substantial.
Preparing for reversals of external current account imbalances is crucial; such reversals are a central risk for emerging Europe.
Flexible factor markets and strong financial systems are identified as critical for cushioning adjustment when external imbalances reverse.

Build buffers and reduce vulnerabilities to ensure "safe driving" amid capital inflows.
Prepare proactively for the reversal of external current account imbalances ("the curve ahead") to avoid painful adjustments.
Strengthen flexibility in factor markets.
Reinforce financial system resilience.

Methodology: general equilibrium theoretical framework applied to issues of finance and convergence in emerging Europe.
Subject areas explicitly identified: Capital inflows, Consumption, Credit, Current account deficits, Productivity.
Keywords provided: current account, interest rate, open economy, WP.

_wp07244 - References
- _wp07244 - References (Markdown version)
- _wp07244 - References (PDF)