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Financial Reforms And Capital Flows To Emerging Europe

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Executive Summary

Analysis of 21 emerging European economies reveals a substantial role for domestic financial reforms in attracting net capital flows. Controlling for standard determinants of capital flows, the authors find in particular banking sector reforms to be consistent with larger current account deficits and net financial inflows, whereas opposite or no effects are found for security market reforms as well as for indicators of financial depth. Additional net inflows are reaped by the EU accession countries. Banking reforms are found to have a significant impact on FDI and "Other" investment net inflows; they have a significant effect on gross financial inflows, but not on outflows.

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