Real Convergence,Capital Flows,and Competitiveness in Central and Eastern Europe

The paper scrutinizes the role of capital flows for competitiveness in the new EU member states in the context of real convergence. For this purpose it extends the seminal Balassa–Samuelson model by international capital markets to trace cyclical deviations of real exchange rates from the productivity‐driven equilibrium path. Panel estimations for the period from 1998 to 2009 reveal strong evidence for the Balassa–Samuelson effect and mixed results for the role of capital flows for international competitiveness of the Central and Eastern European countries.