Managing capital flows in Estonia and Latvia

Pekka Sutela

No 17/2001, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

Abstract: The three Baltic countries have been able to combine, Estonia since 1992 and Latvia and Lithuania since 1994, (1) a fixed exchange rate, (2) liberalisation of the capital account before having a well-functioning and fully supervised financial system, and (3) very large current account deficits.At the same time they have gone through deep structural and institutional change, which has been even faster than in several other transition economies.How have they been able to manage such a combination of characteristics that would usually be regarded inconsistent? The answer is not in clever management or control of financial markets combined with sound fundamentals.Rather, the Baltic countries have lacked several such markets that might be sources of instability.There are hardly any inter-bank markets.Public debt is absent or relatively very small.After the boomlet of 1997, the Baltic stock exchanges have generally hibernated.Banking crises have been recurrent.Not only are these economies extremely small, their degree of monetisation is very low.There are very few assets and markets for speculative capital flows. Partially, this reflects sound fundamentals, but mostly it is an unintended consequence of policy decisions.One cannot expect the experience to be easily repeated in other countries.

Keywords: the Baltic countries; capital flows and controls; financial crises; currency boards (search for similar items in EconPapers)
Date: 2001
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