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Can policy improve liquidity during a financial crisis?

Author

Listed:
  • 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)

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.

Suggested Citation

  • Ivo Karilaid & Tõnn Talpsepp, 2010. "Can policy improve liquidity during a financial crisis?," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 10(2), pages 5-26, December.
  • Handle: RePEc:bic:journl:v:10:y:2010:i:2:p:5-26
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    File URL: http://biceps.org/assets/docs/bje/Karilaid_Talpsep.pdf
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
    3. 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.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. 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.
    6. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    7. 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, Taylor & Francis Journals, vol. 46(6), pages 25-59, November.
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    Cited by:

    1. Ivo Karilaid & Tõnn Talpsepp & Tarvo Vaarmets, 2014. "Implications of the liquidity crisis in the Baltic-Nordic region," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 14(1-2), pages 35-54, December.

    More about this item

    Keywords

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

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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