Vulnerability of emerging Europe in external adjustment and financing mechanisms

Abstract

© Presses Universitaires de France. This paper deals with the vulnerable position of Emerging Europe in external adjustment and financing mechanisms compared to emerging Latin America and Asia. By stressing the difference between peggers and floaters, we analyze how current account shock is transmitted to the variables reflecting restrictive and redistributive adjustment, as well as different external financing channels. The empirical findings, based on an estimated panel VAR model for the period 2000Q1-2016Q4, confirm the strongest restrictive and redistributive adjustment mechanisms in the case of emerging Europe, as well as the most sensitive reaction of capital flows to current account shock. Besides the advantage of floating exchange regimes as shock absorbers, the resilience of emerging economies is primarily grounded on strong macroeconomic fundamentals irrespective of the exchange rate regime applied.