Cointegration Between Capital Flows and GDP in the Visegrád Countries. Implications for the Post Pandemic Era

Abstract

This chapter verifies presence of long-term co-integration between net capital inflows and GDP of the Visegrád Group countries (Czechia, Hunagary, Poland and Slovakia). Its aim is to investigate whether the GDP of the Visegrád (V4) countries and capital flows between the V4 and developed countries (in particular the European Monetary union) were integrated in such a way that they did not diverge from some equilibrium in the long term. The existence and strength of these relationships may be important for determining conditions for GDP growth in the post-pandemic era. Using the autoregressive distributed lag model (ARLD) the level of cointegration between push factors (current account and banks’ net cross-border positions) and the net capital flows of the Visegrád countries is established. Furthermore, taking push factors as fixed regressors, and applying the ARLD model, the cointegration level between net capital flows and GDP, for the different time periods, is estimated for each of the V4 economies. The current account of the EMU was identified as a push factor for net capital flows in Czechia, Poland and Slovakia. Bank net cross-border positions of the EMU turned out to be push factors in Poland and bank net cross-border positions of the developed countries were statistically significant as push factors in Hungary and Slovakia. Using the ARLD model, cointegrations of current account and bank net cross-border positions with GDP were found in each of the V4 countries in the whole period 1995–2019. The strength of these cointegrations was the greatest in the last ten years i.e., in the period 2009–2019. No cointegration was found when calculated for 1995–2008. The analysis of data for the years 1995–2019 is extended by presenting recent changes of net capital inflows in the EMU and the V4 countries. The dynamics of the changes during the time of the pandemic (2020–2022) is discussed against the background of the results of cointegration. From the perspective of the past relationships between net capital flows and GDP in the V4 countries, changes in net capital flows observed in 2020 and later indicate potential threats to the recovery of GDP growth after the shocks caused by the pandemic and the war in Ukraine. If these shocks do not change the long-lasting cointegration between net capital flows and GDP then sudden and substantial changes of net capital flows in the V4 countries should be treated as an impediment to the recovery of sustainable GDP growth. Presumably, a corrected policy mix must therefore be adopted in order to avoid creating conditions for stagflation.