Effects of Capital Account Liberalization :

1
Effects of Capital Account Liberalization
The case of Romania1 by Florin Cîtu and
Daniel Daianu 1 The authors would like to
thank Laurian Lungu for comments on an earlier
version of this study. Also, we would like to
thank Romanian Commercial Bank, ING Bank Romania,
BRD Groupe Societe Generale, Alpha Bank Romania,
and HVB Bank for financial support. All errors
and omissions are our own.
2
Objectives

• Examine empirically/narrative the (potential)
  effect of KAL on exchange rate dynamics and
  macroeconomic stability
• Explain/examine/identify the contribution of KAL
  to the improvement of market competition in
  Romania.
• Over-riding objective of learning more about the
  dynamics of the Romanian economy

3
Structure

• Capital account liberalization (KAL )
• The EU and KAL .
• Romanias KAL
• Econometric analysis
• What lies ahead?

4
Romanias KAL

• Disinflation Dynamics
• Features of Romania's monetary economy .
• KAL and inflation targeting (IT) in Romania

5
KAL and inflation targeting (IT) in Romania

• Policy implications of KAL and IT Features of
  Romania's monetary economy
• The credibility challenge
• Overburdening of budget policy
• Excessive appreciation of ROL
• Large variability of output dynamics

6
Empirical Relationships

• The RON Exchange rate

7
Empirical Relationships

• The RON Exchange rate

8
Empirical Findings

• Current Account and Capital Account

9
Policy Recommendations

• Over the short-term economic policy should focus
  on the management of capital flows .
• The bulk of the evidence and experience suggests
  that taxes or other barriers to capital flows
  are, at best, a short-term panacea, but cannot be
  an effective or long-term solution.
• Direct monetary and exchange rate policy to
  control and reduce inflation and avoid real
  exchange rate appreciation
• Pursue fiscal restraint and sustainable
  government budget deficits .

10
Policy Recommendations

• Invest in the enhancement of the operation of
  markets and institutions.
• Taxes or other barriers to capital flows are only
  a palliative and not a solution to the issue of
  managing capital flows.

11
Conclusions

• Empirical analysis shows that Romanian economy
  will sustain the same pressures, (i.e. currency
  appreciation, growing current account deficit,
  higher real wages, etc) from KAL as did other
  similarcapital scarceeconomies at the time of
  KAL.
• Consistently lower inflation should lead to lower
  interest rates and volatility in the exchange
  rate and output.