Capital inflows, crisis and recovery in small open economies

Hamid Raza, Gylfi Zoega and Stephen Kinsella ()
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Hamid Raza: Aalborg University, Denmark

No 1709, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: We compare two small open economics, Iceland and Ireland, that experienced a capital inflow through their banking systems in the period preceding the 2008 financial crises but differ in their currency arrangements. Both countries have mostly recovered from their respective crises, but the differences in the way their economies adjusted are interesting. The evidence suggests that changes in the real exchange rate served as the adjusting mechanism for Iceland’s current account while in Ireland domestic demand compression served as the main adjustment mechanism. We also explore the adjustment to the crisis in three other Eurozone economies and find that they were similar to the one in Ireland.

Keywords: sudden stop; real exchange rates; demand compression. (search for similar items in EconPapers)
JEL-codes: F32 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-eec, nep-mon and nep-opm
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https://eprints.bbk.ac.uk/id/eprint/26858 First version, 2017 (application/pdf)

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Journal Article: Capital inflows, crisis and recovery in small open economies (2018)
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