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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: https://www.tandfonline.com/doi/epdf/10.1080/1406099X.2010.10840476
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    References listed on IDEAS

    as
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    Cited by:

    1. Varaidzo Denhere & David Mhlanga, 2021. "The Use of Surrogate Currency to Address Liquidity Crisis: The Zimbabwean Experience," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 9(3), pages 159-169.
    2. 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.

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    Keywords

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    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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