1. Effects of Capital Account Liberalization : The case of Romania [1] [1] by Florin Cîţu and Daniel Daianu [1][1] The authors would like to thank Laurian Lungu for comments on an earlier version of this study. Also, we would like to thank Romanian Commercial Bank, ING Bank Romania, BRD Groupe Societe Generale, Alpha Bank Romania, and HVB Bank for financial support. All errors and omissions are our own.

2. Objectives Examine empirically/narrative the (potential) effect of KAL on exchange rate dynamics and macroeconomic stability; Explain/examine/identify the contribution of KAL to the improvement of market competition in Romania. Over-riding objective of learning more about the dynamics of the Romanian economy

3. Structure Capital account liberalization (KAL ) The EU and KAL. Romania’s KAL Econometric analysis What lies ahead?

4. KAL and inflation targeting (IT) in Romania Policy implications of KAL and IT Features of Romania's monetary economy : –The credibility challenge –Overburdening of budget policy –Excessive appreciation of ROL –Large variability of output dynamics

5. Empirical Reltionships The RON Exchange rate:

6. Empirical Realtionships The RON Exchange rate:

7. Current Account and Capital Account: Empirical Findings

8. Policy Recommendations Over the short-term economic policy should focus on the management of capital flows. The bulk of the evidence and experience suggests that taxes or other barriers to capital flows are, at best, a short-term panacea, but cannot be an effective or long-term solution.  Direct monetary and exchange rate policy to control and reduce inflation and avoid real exchange rate appreciation; Pursue fiscal restraint and sustainable government budget deficits.

9. Policy Recommendations Invest in the enhancement of the operation of markets and institutions. Taxes or other barriers to capital flows are only a palliative and not a solution to the issue of managing capital flows.

10. Conclusions Empirical analysis shows that Romanian economy will sustain the same pressures, (i.e. currency appreciation, growing current account deficit, higher real wages, etc) from KAL as did other similar—capital scarce—economies at the time of KAL. Consistently lower inflation should lead to lower interest rates and volatility in the exchange rate and output.