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The East European Financial Crisis

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  • Anders Aslund

Abstract

This paper discusses the global financial crisis of 2008/9 in thirteen countries, the ten new EU members that previously were communist and the three countries of Western former Soviet Union. Their problems were excessive current account deficits and private foreign debt, currency mismatches, and high inflation, while public finances were in good shape. The dominant cause was fixed exchange rates. Many lessons can be drawn from this crisis. A dollar peg makes no sense in this part of the world. The five currency boards in the region have lacked credibility. By contrast, inflation targeting has worked eminently. The euro has proven credible both in the countries that officially adopted it and in the countries that adopted it unilaterally. With the exception of Hungary, all the countries in the region have displayed decent fiscal policies. No government should accept large domestic loans in foreign currency and they can be regulated away. The IMF has successfully returned to the original Washington consensus with relatively few conditions: a reasonable budget balance and a realistic exchange rate policy, while focusing more on bank restructuring. The most controversial issue is the role of the ECB. The ECB should facilitate the accession of willing EU members to the euro by relaxing the ERM II conditions.

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Bibliographic Info

Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0395.

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Length: 30 Pages
Date of creation: 2009
Date of revision:
Handle: RePEc:sec:cnstan:0395

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Related research

Keywords: Financial crisis; macroeconomics; exchange rate policy; Eastern Europe; transition;

References

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  1. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," Working Papers Central Bank of Chile 409, Central Bank of Chile.
  2. Philip R. Lane & Gian Maria Milesi-Ferretti, 2006. "Capital Flows to Central and Eastern Europe," The Institute for International Integration Studies Discussion Paper Series iiisdp161, IIIS.
  3. Haselmann, Rainer, 2006. "Strategies of foreign banks in transition economies," Emerging Markets Review, Elsevier, vol. 7(4), pages 283-299, December.
  4. Zsolt Darvas & Gy�rgy Szap�ry, 2008. "Euro Area Enlargement and Euro Adoption Strategies," European Economy - Economic Papers 304, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  5. Zsolt Darvas & Jean Pisani-Ferry, 2008. "Avoiding a new European divide," Policy Briefs 227, Bruegel.
  6. Jean Pisani-Ferry & Adam Posen, . "The euro at ten: the next global currency?," Books, Bruegel, number 303, September.
  7. Dabrowski, Marek, 2006. "Rethinking balance-of-payments constraints in a globalized world," MPRA Paper 11962, University Library of Munich, Germany.
  8. Guillermo A. Calvo, 1998. "Capital Flows and Capital-Market Crises: The Simple Economics of Sudden Stops," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 35-54, November.
  9. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2009. "Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008," American Economic Review, American Economic Association, vol. 99(2), pages 480-86, May.
  10. Anders Aslund & Marek Dabrowski, 2008. "Challenges of Globalization: Imbalances and Growth," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4181, July.
  11. Sebastian Edwards, 2005. "Capital Controls, Sudden Stops and Current Account Reversals," NBER Working Papers 11170, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Richard Pomfret, 2011. "Global Crises, Fiscal Imbalances and Global Instability: Interests and Reactions of Asian Economies," School of Economics Working Papers 2011-33, University of Adelaide, School of Economics.
  2. Richard Connolly, 2010. "The EU Economy: Member States Outside the Euro Area in 2009," Journal of Common Market Studies, Wiley Blackwell, vol. 48(s1), pages 243-266, 09.
  3. Giovanni Andrea Cornia & Bruno Martorano, 2013. "Development policies and income inequality in selected developing regions, 1980-2010," Working Papers - Economics wp2013_13.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  4. Kibritçioğlu, Aykut, 2011. "2006-2011 Küresel Ekonomik Krizinin Bileşenleri ve Karmaşıklığı
    [The Components and Complexity of the Global Economic Crisis of 2006-2011]
    ," MPRA Paper 33515, University Library of Munich, Germany, revised 18 Jul 2011.
  5. Giovanni Andrea Cornia, 2012. "The New Structuralist Macroeconomics and Income Inequality," Working Papers - Economics wp2012_25.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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