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Financial Crisis, Economic Recovery and Banking Development in Former Soviet Union Economies

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Author Info
Marin, Dalia
Huang, Haizhou
Xu, Chenggang

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Abstract

This paper provides a unified theory to explain the onset of the financial crisis in 1998 and the striking economic recovery in Russia and the former Soviet Union afterwards. Before the crisis, the banking sector in these economies was stuck in a development trap in which the banking sector is separated from the real sector of the economy. The separation between the two sectors arises due to a lemons lending market and due to a large government budget. In a lemons credit market firms may find it cheaper to raise liquidity through non-bank finance (trade credits from other firms) rather than through bank finance. As a result non-bank finance may generate an externality on the lending rates of banks. In equilibrium most firms in the economy rely on non-bank finance and the financial sector focuses on trading government securities. The collapse of the treasury bills market in Russia in the financial crisis of 1998 reversed this process and thus acted as a trigger to pull the economy out of the trap. This has led to the strong economic recovery and provided initial conditions for banking development. Empirical evidence with firm level data from Ukraine in 1997 and with country level data for transition economies support the model’s predictions.

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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 27.

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Date of creation: Sep 2002
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Handle: RePEc:lmu:muenec:27

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Related research
Keywords: banking development ; institutional trap ; trade credit ; nonbank finance ; finance in emerging market economies;

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Find related papers by JEL classification:
G3 - Financial Economics - - Corporate Finance and Governance
G2 - Financial Economics - - Financial Institutions and Services
P34 - Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dalia Marin & Monika Schnitzer, 2000. "Disorganization and Financial Collapse," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Guillermo Calvo & Fabrizio Coricelli, 1992. "Output Collapse in Eastern Europe - The Role of Credit," IMF Working Papers 92/64, International Monetary Fund.
  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.). [Downloadable!]
    Other versions:
  4. Dalia Marin & Monika Schnitzer, 2002. "Contracts in Trade and Transition: The Resurgence of Barter," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133997.
  5. Loayza, Norman & Ranciere, Romain, 2004. "Financial development, financial fragility, and growth," Policy Research Working Paper Series 3431, The World Bank. [Downloadable!]
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  6. Olivier Blanchard & Michael Kremer, 1997. "Disorganization," William Davidson Institute Working Papers Series 38, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  7. Marin, Dalia & Kaufmann, Daniel & Gorochowskij, Bogdan, 2000. "Barter in Transition Economies: Competing Explanations Confront Ukrainian Data," Discussion Papers in Economics 63, University of Munich, Department of Economics. [Downloadable!]
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  8. Prakash Loungani & Paolo Mauro, 2000. "Capital Flight from Russia," IMF Policy Discussion Papers 00/6, International Monetary Fund.
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  9. Perotti, Enrico, 2002. "Lessons from the Russian Meltdown: The Economics of Soft Legal Constraints," International Finance, Blackwell Publishing, vol. 5(3), pages 359-99, Winter. [Downloadable!] (restricted)
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  10. Erik Berglof & Patrick Bolton, 2002. "The Great Divide and Beyond: Financial Architecture in Transition," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 77-100, Winter. [Downloadable!] (restricted)
  11. Gelfer, Stanislav & Perotti, Enrico C, 1999. "Red Barons or Robber Barons? Governance and Financing in Russian FIG," CEPR Discussion Papers 2204, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  1. José Noguera & Susan J. Linz, 2005. "Barter, Credit, and Welfare: A theoretical inquiry into the barter phenomenon in Russia," William Davidson Institute Working Papers Series wp757, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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