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

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  • Marin, Dalia
  • Huang, Haizhou
  • Xu, Chenggang

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.

Suggested Citation

  • Marin, Dalia & Huang, Haizhou & Xu, Chenggang, 2002. "Financial Crisis, Economic Recovery and Banking Development in Former Soviet Union Economies," Discussion Papers in Economics 27, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:27
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    File URL: https://epub.ub.uni-muenchen.de/27/1/0209_marin.pdf
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    Cited by:

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    2. Jos?? 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.

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    More about this item

    Keywords

    banking development ; institutional trap ; trade credit ; nonbank finance ; finance in emerging market economies;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G2 - Financial Economics - - Financial Institutions and Services
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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