Capital flows and the boom–bust cycle: The case of Estonia
Economic Systems
Download Document| Date Published | 2010 |
| Version | |
| Primary Author | Zuzana Brixiova |
| Other Authors | Laura Vartia; Andreas Wörgötter |
| Theme | |
| Country | Estonia |
Abstract
During 2000–2007, Estonia was among the fastest growing emerging market economies, but in late-2008 entered a deep recession. This paper examines shocks, institutions, and policies that havemade Estonia’s boom–bust cycle so severe. It finds that an open capital account, the prospect for EU entry, and the currency board facilitated massive capital inflows, which led to credit and real estate booms. In late-2008 a domestic slowdown was greatly amplified by the global financial and economic crisis. To resume sustainable growth, the country will need to regain competitiveness and rebalance resources to exports. Estonia’s experience underscores the importance for other emerging market economies to retain some flexibility in their macroeconomic frameworks and approach capital account liberalization cautiously.