Capital Flows Adjustment Policy in Slovenia: Assessment of Design and Efficiency

Abstract

During the last decade many Central and East European (CEE) countries experienced strong foreign capital inflows. Slovenia was one of them. Sources of inflows in Slovenia changed radically, even though privatisation-driven inflows were absent, in contrast to other CEE countries. Since such inflows could have significant adverse effects on the performance of the economy, some policy measures were taken. This article presents an empirically tested assessment of policy for adjustment to surges in capital flows during the last decade. Speculative reversals, a decline in external competitiveness, exchange rate appreciation, loss of control over the monetary base and inflation are just some of the detrimental effects that can be provoked by surges in capital flows if the economy suffers from fundamental sectoral deficiencies. Empirical results indicated that Slovenia quite successfully mitigated the listed effects of excessive foreign exchange inflows. Efficient combination of direct and indirect adjustment methods succeeded in preventing the still vulnerable economy from suffering a major financial crisis and nominal currency appreciation (which was not the case in some other CEE countries) although there was some real appreciation.