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Can policy improve liquidity during a financial crisis?

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  • Ivo Karilaid

    ()
    (Tallinn School of Economics and Business Administration (TSEBA) at Tallinn University of Technology)

  • Tõnn Talpsepp

    ()
    (Tallinn School of Economics and Business Administration (TSEBA) at Tallinn University of Technology)

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    Abstract

    This paper empirically examines the development and determinants of the liquidity position in the financial sector during the recent financial crisis in the Baltic-Scandinavian region. We look at fiscal and monetary policy implications of liquidity problems arising in the crisis. The results are consistent with theoretical predictions for a small open economy with the expected sign of changes and developments in common economic indicators. Changes (and the speed of changes) in interest rates, GDP and money supply have occurred relatively rapidly, meaning that the rising area of the LM-curve has been shorter than theory would predict. Market reactions took place quickly and simultaneously – there was no time for slow restructuring, so that liquidity needs were higher than usual.

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    Bibliographic Info

    Article provided by Baltic International Centre for Economic Policy Studies in its journal Baltic Journal of Economics.

    Volume (Year): 10 (2010)
    Issue (Month): 2 (December)
    Pages: 5-26

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    Handle: RePEc:bic:journl:v:10:y:2010:i:2:p:5-26

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    Related research

    Keywords: financial crisis; policy implications; liquidity position; capital flows;

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    1. Priit Vahter & Jaan Masso, 2007. "Home versus Host Country Effects of FDI: Searching for New Evidence of Productivity Spillovers," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 53(2), pages 165-196.
    2. Jaan Masso & Urmas Varblane & Priit Vahter, 2008. "The Effect of Outward Foreign Direct Investment on Home-Country Employment in a Low-Cost Transition Economy," Eastern European Economics, M.E. Sharpe, Inc., vol. 46(6), pages 25-59, November.
    3. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
    4. Zuzana Brixiova & Laura Vartia & Andreas Wörgötter, 2009. "Capital Inflows, Household Debt and the Boom-bust Cycle in Estonia," OECD Economics Department Working Papers 700, OECD Publishing.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
    6. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
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