Capital Account Liberalization And Currency Crises In CEE: An Empirical Study

Central and Eastern European countries quickly became the worst-hit areas afterthe global financial crisis in2008. This serious currency crisis highlights the defectsof the economic development mode of CEE countries. This mode is closely related tothe capital account liberalization policy of CEE countries. Therefore, the relationshipbetween capital account liberalization and currency crisis has become popular topic oftransition economics. We investigate both the process and patterns of capital accountliberalization and characteristics of currency crises in CEE countries. Then four panelmodels are used into empirical analysis of the relationship between capital accountliberalization and currency crisis and the pass-through mechanism in CEE countries.Under the strict requirements of EU and OECD, CEE countries all have adoptedthe capital account liberalization policy. But the speed and degree of capital accountliberalization in CEE countries differs. The Baltic state took the radical mode of thecapital account liberalization and firstly opened their capital account. Hungary, theCzech Republic and Slovenia took the intermediate mode of the capital accountliberalization. Some countries tended to cautious attitudes to the capital accountliberalization and adopted the gradual mode such as Poland, Slovakia and Bulgaria.The analysis of the foreign exchange market pressure index and frequency of currencycrises show that the higher degree of the capital account liberalization is usuallyaccompanied with larger fluctuation of foreign exchange market pressure index adhigher frequency of currency crisis. In addition, the current-account deficit andexternal debt-GDP ratio increase after CEE countries adopted the capital accountliberalization policy. And the higher degree of capital account liberalizationcorrespond higher current-account deficit and external debt-GDP ratio. Therefore, thecapital account liberalization in CEE countries leads to leads to the deterioration ofthe macroeconomic condition. Then the probability of currency crisis increases underthe external shocks.In terms of empirical analysis, we use the foreign exchange market pressureindex of central and eastern European countries over the period2001-2011tostructure the currency crisis index. The panel data logit model is used to regression analysis. The empirical results show that the capital account liberalization in CEEcountries are positively correlated with currency crisis risk, the higher the degree ofcapital account liberalization, the higher the risk of currency crisis. In addition, theestimated results not only have proved the existence of pass-through mechanism inCEE countries, but also highlights the pass-through mechanism in the countries of theradical mode is stronger.