Proceedings of the New York State Economics Association


Do International Capital Flows Worsen Macroeconomic Volatility in Transition Economies?

Scott W. Hegerty

vol. 4, September 2011, p. 62-70


The 2008 financial crisis ultimately resulted in severe output declines in the transition economies of Central and Eastern Europe. Are capital movements responsible for the rapid growth and subsequent recession in this region? To answer this question, we examine the responses of output, consumption, and investment variability to shocks to both Foreign Direct Investment and non-FDI flows. Impulse-response and variance decomposition analysis shows that "hot" non-FDI flows contribute more to macroeconomic volatility than do more stable FDI flows, and that certain countries, particularly those with fixed exchange rates, seem to be more vulnerable to shocks than others.


suggested citation:

Scott W. Hegerty. "Do International Capital Flows Worsen Macroeconomic Volatility in Transition Economies?." Proceedings of the New York State Economics Association. vol. 4, September 2011, p. 62-70

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