# _<u>Robustness Tests</u>_

We conduct several robustness tests. Growth-conducive effects of the increased reliance on external finance in emerging Europe are also found in the panel estimation based on a revised sample that refers only to the period from 1997 onwards (not reported). Specifically, the coefficients on the foreign capital variables retain the statistical significance and magnitude in both the EU10 and EU candidate countries. The re-estimation suggests that the relationship between the explanatory variables and growth holds even when we exclude the growth experience of other economies before the mid-1990s. Finally, the consistency of the results is investigated in a sample that excludes economies with annual GDP per capita (in PPP terms) above US$20,000; i.e., advanced economies (also not reported). The rationale is to examine whether the financial integration experience of emerging Europe displays a different growth pattern from the countries that are also facing economic development challenges. Again, the results show that the coefficients of interest are consistent with our previous findings.

# **Table 7. Pre-Crisis Excesses Do** **<u>Not Undo the Foreign Savings and Growth Link</u>**

|_Growth regressions_|Ro<br>|Dependent va<br>averagegrowth of re<br>bustness to Changes in Sample. Exclu<br> <br>|riable is four-year<br>al GDPper capita(PPP)<br>de from EmergingEurope the countries<br> <br>|with:<br>|
|---|---|---|---|---|
||(i)above-ave|ragegrowth<br>(ii)observatio|ns with + 1 SD<br>(iii)observatio|ns with ± 1 SD|
|_Explanatory variable_|1973-|08<br>1973-|08<br>1973-|08|
|Log of initial GDP x capita<sup>[A]</sup>|-2.259|-2.190|-2.201||
||[0.433]|[0.430]<br>***|[0.429]<br>***|***|
|Educational attainment of|0.470|0.453|0.455||
|pop. > 25 years of age|[0.116]|[0.115]<br>***|[0.116]<br>***|***|
|Population growth|-0.314|-0.328|-0.353||
||[0.142]|[0.143]<br>**|[0.147]<br>**|**|
|Relative price of investment|-0.104|-0.049|-0.029||
||[0.614]|[0.573]|[0.576]||
|Trade openness (in percent of|0.011|0.011|0.011||
|GDP)|[0.003]|[0.003]|[0.003]||
|Current account balance; in|0.049|0.046|0.047||
|% GDP, 4-year (CAB)|[0.056]|[0.055]|[0.054]||
|EU 10 and EU candidate|-0.609|-0.660|-0.568||
|dummy times CAB|[0.343]|[0.277]<br>*|[0.304]<br>***|*|
|EU neighborhood country|0.488|0.474|0.480||
|dummy times CAB|[0.126]|[0.121]<br>***|[0.128]<br>***|***|
|Number of observations|565|573|568||
|Number of countries|88|88|88||
|Number of instruments|40|40|40||
|Hansen test for over-|0.236|0.206|0.227||
|identifying restrictions|||||
|Arellano-Bond AR(1) test|0.000|0.000|0.000||
|Arellano-Bond AR(2)test|0.706|0.711|0.736||

Notes:<sup>[A]</sup> GDP data are adjusted for international differences in purchasing power of the dollar. Robust standard errors in parentheses; asterisks indicate statistical significance at the ***1, **5, and *10 percent level. All equations include time period and group-specific dummies. Data for the transition economies refer only from 1997 onwards. All equations include time period and group-specific dummies.

# **6. Concluding Remarks**

This paper provides evidence that the new EU member states and the EU candidate countries have been able to speed up their income convergence through greater reliance on foreign capital. The growth equations reveal that the current account deficits are positively correlated with medium-term economic growth in those two groups of countries. The experience of the EU 21