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Capital Flows and the Boom-Bust Cycle: The Case of Estonia

Posted: 6 Mar 2010  

Zuzana Brixiova

International Monetary Fund (IMF) - European Department; African Development Bank

Laura Vartia

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Andreas Woergoetter

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO)

Abstract

During 2000-2007, Estonia was among the fastest growing emerging market economies, but in late 2008 entered a deep recession. This paper examines shocks, institutions, and policies that have made Estonia’s boom-bust cycle so severe. It finds that an open capital account, the prospect for EU entry, and the currency board facilitated massive capital inflows, which led to credit and real estate booms. In late 2008 a domestic slowdown was greatly amplified by the global financial and economic crisis. To resume sustainable growth, the country will need to regain competitiveness and rebalance resources to exports. Estonia’s experience underscores the importance for other emerging market economies to retain some flexibility in their macroeconomic frameworks and approach capital account liberalization cautiously.

Keywords: Capital flows, Boom-bust cycle, Global financial and economic crisis, Estonia

JEL Classification: E3, F30, E42

Suggested Citation

Brixiova, Zuzana and Vartia, Laura and Woergoetter, Andreas, Capital Flows and the Boom-Bust Cycle: The Case of Estonia. Economic Systems, Vol. 34, No. 1, 2010. Available at SSRN: https://ssrn.com/abstract=1564822

Zuzana Brixiova (Contact Author)

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-7000 (Phone)
202-623-4661 (Fax)

African Development Bank ( email )

Rue Joseph Anoma
01 BP 1387
Ivory Coast (Cote D'ivoire)

Laura Vartia

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

Andreas Woergoetter

Organization for Economic Co-Operation and Development (OECD) - Economics Department (ECO) ( email )

2 rue Andre Pascal
Paris Cedex 16, MO 63108
France

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