capital flows. To make these relationships more precise and to study the separate effects of some of these factors we provide some regression results in this section.

The main aim of the regressions is to try to explain the magnitude of the various types of capital flows for individual countries. Common with the existing literature (e.g., Calvo, Leiderman and Reinhart, 1993, Cuhan, Claessens, and Mamingi, 1998; Hernandez and Rudolph, 1995, and Taylor and Sarnio, 1997; Montiel and Reinhart, 1997, provides a review of this literature), we distinguish two groups of explanatory vaiiables: international factors ("pushfactors"); and domestic factors ("pull factors). Push-factors are thought of conditions in global capital markets that influence the supply of capital and aie outside the control of a particular recipient country. Pull-factors are thought of as country-specific factors and conditions influencing the interest of foreign capital of investing in that particular country. Some of these factors are under the control of the country; some are initial conditions; and others are outcomes, which are in part influenced by capital flows themselves.

For the group of pull-factors, we use the US-dollar, 6-month LIBOR interest rate, and the economic growth in OECD-countries. We expect that declines in wol1d interest rates will have a positive effect on capital flows to CEE/FSU as that will make the rate of return on investing in these countries higher relative to other alternatives. The effect of an increase in OECD growth rate is less obvious. On one hand, it will likely be associated with a rise in the rate of return on investment in OECD-countries, thus reducing the attractiveness of investing in transition economies. On the other hand, higher growth may raise the supply of savings in OECDcountries, thus stimulating capital flows.

The group of pull-factors is split into policy factors, i.e., "reform efforts," initial conditions, and "outcomes." Obviously, it is difficult to quantify the degree of policy reform a country has been undertaken in absolute terms. The very similar starting position of most of the transition economies-controlled prices, little private sector activity, limited institutional development, etc.-makes it somewhat easier to quantify at least the relative degree of policy reform in CEE/FSU. We use the liberalization index from Ele Melo et al, 1997, to rank countries in their relative reform efforts. This index, an indicator between 0 and 1, is available for each country and for each year and aims to measure how far the country has progressed in liberalizing prices, trade and private sector activities, including privatization. The initial conditions and outcomes variables are more difficult to separate, as capital flows are likely to interact with and affect current outcomes, which then become initial conditions for subsequent capital flows. We use the country's GDP-growth rates, inflation, fiscal balance, private savings, and, as a creditworthiness indicator, the change in the country's reserves. We lag the change in the country's reserves and the two savings variables by one period to avoid possible simultaneity (as the sum of private, public and foreign savings adds up to the change in reserves). In addition, we also use a dummy for the ten CEE-countries likely to become EU-member.12

> 12 We use the following ten countries that have been identified by the EU as candidates: Czech Republic, Poland, Hungary, Slovenia, Estonia, Romania, Bulgaria, Slovak Republic, Lithuania and Latvia. The first five have recently started negotiations with the EU; we set the dummy equal to two for these countries. For the other five countries, the dummy is set to one, and zero for all other countries.

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