This paper examines the effects of transition and of political instability on foreign direct investment (FDI) flows to the transition economies of Central Europe, the Baltics and the Balkans. We find that FDI flows to transition economies unaffected by conflict and political instability exceed those that would be expected for comparable West European countries. Success with stabilization and reform increased the volume of FDI inflows. In the case of Balkan counties, conflict and instability reduced FDI inflows below what one would expect for comparable West European countries, and reform and stabilization failures further reduced FDI to the region. Thus, we find that the economic costs of instability in the Balkans in terms of foregone FDI have been quite high.JEL classifications: F21, F23, P52.
This paper shows that (i) magnitude and variation of contemporaneous correlation are important in panel unit root tests, and (ii) demeaning across the panel usually does not eliminate these problems. Our contribution is to demonstrate that the extent of size distortion generated by contemporaneous correlations depends on the magnitude of cross-correlation coefficients, their variability and the number of series in the panel. We show that demeaning will not eliminate the size problem caused by the variation of cross correlations, and lead to false inference.The IPS test possesses substantially more power than single-equation ADF test by averaging N independent ADF regressions:0165-1765/$ -see front matter D
In our analysis, we re-examine the nominal and real convergence of all recent 10 European Union (EU) members to EU standards. Testing for monetary convergence has significant implications for interim optimal exchange rate and monetary policies before a formal and permanent link to the euro, while real convergence is the ultimate objective of economic integration. Novel features of the paper include broader measures of real convergence in both euro as well as local currencies, an examination of inflation and interest rate convergence with respect to the Maastricht benchmarks, and employment of more appropriate tests of convergence allowing for structural breaks. The results indicate slow but steady per-capita real income convergence towards EU standards. On the other hand, evidence indicates significant strong inflation and interest rate convergence. Policy implications of the paper are also discussed. #
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