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Financial supply cycles in post-transition Europe – introducing a composite index for financial supply

Tomislav Globan ()

Post-Communist Economies, 2018, vol. 30, issue 4, 482-505

Abstract: This paper introduces a new composite index – the financial supply index (FSI) – measuring the level of supply of foreign capital to small open economies. FSI is estimated on a sample of 11 EU new member states (NMS) applying Kalman filtering, principal components and variance-equal weights. Results indicated that the main drivers of financial supply to NMS are externally determined, with economic sentiment and business climate in the Eurozone carrying the highest weight. FSI proved to have a good predictive power for debt inflow dynamics. In addition, we create a new indicator – the Refinancing Risk Ratio, which relates the supply and demand for foreign capital – to quantify the external refinancing conditions and risk faced by the government. We distinguish between two recent episodes of high refinancing risk – one during the global crisis, and the other during the European sovereign debt crisis – but the episodes significantly differ in nature.

Date: 2018
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Handle: RePEc:taf:pocoec:v:30:y:2018:i:4:p:482-505