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Can policy improve liquidity during a financial crisis?

  • 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)

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    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.

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    Article provided by Baltic International Centre for Economic Policy Studies in its journal Baltic Journal of Economics.

    Volume (Year): 10 (2010)
    Issue (Month): 2 (December)
    Pages: 5-26

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    Handle: RePEc:bic:journl:v:10:y:2010:i:2:p:5-26
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    1. Priit Vahter & Jaan Masso, 2005. "Home Versus Host Country Effects of FDI: Searching for New Evidence of Productivity Spillovers," Bank of Estonia Working Papers 2005-13, Bank of Estonia, revised 10 Dec 2005.
    2. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
    3. 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 257-76, June.
    4. 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, M.E. Sharpe, Inc., vol. 46(6), pages 25-59, November.
    5. 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.
    6. Reinhart, Carmen, 2009. "The Second Great Contraction," MPRA Paper 21485, University Library of Munich, Germany.
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