Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar. Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW. Download this ZEW Discussion Paper from our ftp server: ftp://ftp.zew.de/pub/zew-docs/dp/dp0573.pdf Non-Technical Summary In May 2004, the Czech Republic, Hungary, Poland, the Slovak Republic and Slovenia (hereafter: CEEC-5) joined the European Union (EU). The preconditions for their accession were, that the countries had met the political and economic criteria and adopted all policies and rules of the EU and had ensured their effective enforcement through appropriate administrative structures. Some rules require the removal of all barriers that restrict the transfer of capital and services, since only the free flow of capital and services within the community makes it possible to take full advantage of the single market. Furthermore, the harmonization of financial market regulations has positive effects on monetary policy in an enlarged European Monetary Union (EMU), because different financial structures and levels of financial integration impede an efficient monetary policy by the European Central Bank (ECB). This not only endangers price level stability but also economic growth, since monetary impulses might have asymmetric effects on the economy in central and Eastern European countries due to different structures and degrees of financial market integration. To measure this degree of integration the Feldstein-Horioka approach, which analyzes the degree of financial integration in the CEEC-5 according to the correlation between saving and investment rates, is used. To compare the degree of integration with that of the EMU, eleven member countries (hereafter: EMU-11) are included in the regression. Since the results of the Feldstein-Horioka approach are sensitive to fiscal policies, we include the fiscal budget as an additional variable into the regression to control for these types of policies. We finally analyze the development of the current account of the CEEC-5, in greater detail, to find out if the governments in these countries targeted the current account during the period in transformation. The empirical analysis has shown that potential asymmetric responses to monetary shocks cannot be expected in an enlarged EMU due to a lower degree of financial market integration in the CEEC-5, since the central and Eastern European countries have already reached and even exceeded the higher degree of financial integration in the EMU-11. This development might be explained with the liberalization of capital flows, following the accession to the OECD and the preparations for the accession to the EU. These results are robust to fiscal policies. The analysis of the statistical properties of the current account series furthermore indicates that the countries which faced current account crises during the transition period used their budget to balance the current account in the years after the crises. International Capital Mobility and Current Account Targeting in Central and Eastern European Countries Matthias Köhler Centre for European Economic Research (ZEW) October 2005 (Second Version) Abstract The paper examines the degree of financial integration in five central and Eastern European economies on the basis of saving-investment correlations. A comparison with eleven member states of the European Monetary Union shows that the countries under review have already reached a higher degree of integration in quantitative terms. Since this approach is sensitive to current account targeting policies, the paper uses econometric techniques to control for these kinds of policies, indicating that the central and Eastern European countries that suffered from current account crises in the past might have used fiscal policies to balance the current account.

Volkhart Vincentz and other colleagues not mentioned here for their insightful comments on various drafts of this working paper. In addition, we are grateful to the Alexander von Humboldt-Stiftung of Bad Godesberg, whose generous support allowed us to work together in Munich over a period of some months. This working paper is partly based on the authors ’ article “Making the European Union Fit for Eastern Enlargement, ” published in the 3/2001 issue of International Politics and Society (Politik und Gesellschaft), the journal of the Friedrich-Ebert-Stiftung. With all due consideration for the generous assistance of others, the authors take full responsibility for the contents, and especially the points and positions developed