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Central and Eastern European countries in the global financial crisis: a typical twin crisis?

  • Diemo Dietrich
  • Tobias Knedlik
  • Axel Lindner

This article shows that during the Great Recession banking and currency crises occurred simultaneously in Central and Eastern Europe. Events, however, differed widely from what happened during the Asian crisis that usually serves as the model case for the concept of twin crises. We look at three elements that help to explain the nature of events in Central and Eastern Europe: the problem of currency mismatches, the relation between currency and banking crises and the importance of multinational banks for financial stability. We show that theoretical considerations concerning internal capital markets of multinational banks help us understand what happened on capital markets and in the financial sector of the region. We discuss opposing effects of multinational banking on financial stability and find that institutional differences are the key to understanding different effects of the global financial crisis. In particular, we argue that it matters whether international activities are organised by subsidiaries or by cross-border financial services, how large the share of foreign currency-denominated credit is and whether the exchange rate is fixed or flexible. Based on these three criteria we give an explanation why the pattern of the crisis in the Baltic countries differed markedly from that in Poland and the Czech Republic, the two largest countries of the region.

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Article provided by Taylor & Francis Journals in its journal Post-Communist Economies.

Volume (Year): 23 (2011)
Issue (Month): 4 (April)
Pages: 415-432

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Handle: RePEc:taf:pocoec:v:23:y:2011:i:4:p:415-432
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  9. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2005. "How banks go abroad : branches or subsidiaries ?," Policy Research Working Paper Series 3753, The World Bank.
  10. Diemo Dietrich, 2002. "Investment Behaviour of Financially Constrained Multinational Corporations: Consequences for the International Transmission of Business Cycle Fluctuations," IWH Discussion Papers 165, Halle Institute for Economic Research.
  11. Diemo Dietrich, 2006. "Asset Tangibility and Capital Allocation within Multinational Corporations," IWH Discussion Papers 4, Halle Institute for Economic Research.
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  13. Buch, Claudia M. & Lipponer, Alexander, 2007. "FDI versus exports: Evidence from German banks," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 805-826, March.
  14. Diemo Dietrich & Axel Lindner, 2002. "Währungspolitische Lehren aus dem Scheitern des argentinischen Currency board," Wirtschaft im Wandel, Halle Institute for Economic Research, vol. 8(15), pages 463-469.
  15. Falko Fecht & Hans Grüner, 2008. "Limits to International Banking Consolidation," Open Economies Review, Springer, vol. 19(5), pages 651-666, November.
  16. Gray, Jean M. & Gray, H. Peter, 1981. "The multinational bank: A financial MNC?," Journal of Banking & Finance, Elsevier, vol. 5(1), pages 33-63, March.
  17. Reuven Glick & Ramon Moreno & Mark Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
  18. Dietrich, Diemo & Jindra, Björn, 2010. "Corporate governance in the multinational enterprise: A financial contracting perspective," International Business Review, Elsevier, vol. 19(5), pages 446-456, October.
  19. De Haas, Ralph & Naaborg, Ilko, 2006. "Foreign banks in transition countries. To whom do they lend and how are they financed?," MPRA Paper 6320, University Library of Munich, Germany.
  20. Tobias Knedlik, 2006. "Signaling Currency Crises in South Africa," IWH Discussion Papers 19, Halle Institute for Economic Research.
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