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

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  • Diemo Dietrich
  • Tobias Knedlik
  • Axel Lindner

Abstract

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.

Suggested Citation

  • Diemo Dietrich & Tobias Knedlik & Axel Lindner, 2011. "Central and Eastern European countries in the global financial crisis: a typical twin crisis?," Post-Communist Economies, Taylor & Francis Journals, vol. 23(4), pages 415-432, April.
  • Handle: RePEc:taf:pocoec:v:23:y:2011:i:4:p:415-432 DOI: 10.1080/14631377.2011.622561
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    References listed on IDEAS

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    1. Diemo Dietrich & Uwe Vollmer, 2010. "International Banking and Liquidity Allocation," Journal of Financial Services Research, Springer;Western Finance Association, pages 45-69.
    2. Elhanan Helpman, 2006. "Trade, FDI, and the Organization of Firms," Journal of Economic Literature, American Economic Association, pages 589-630.
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    14. Knedlik, Tobias, 2006. "Signaling Currency Crises in South Africa," IWH Discussion Papers 19/2006, Halle Institute for Economic Research (IWH).
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    23. Tobias Knedlik & Rolf Scheufele, 2008. "Forecasting Currency Crises: Which Methods Signaled The South African Crisis Of June 2006?," South African Journal of Economics, Economic Society of South Africa, vol. 76(3), pages 367-383, September.
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    Cited by:

    1. Gábor Dávid Kiss & Tamás Schuszter, 2015. "The Euro Crisis and Contagion among Central and Eastern European Currencies: Recommendations for Avoiding Lending in a Safe Haven Currency such as CHF," Prague Economic Papers, University of Economics, Prague, pages 678-698.
    2. Teuta Ismaili Muharremi, 2015. "Currency Crisis Revisited: A Literature Review," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, pages 117-124.
    3. Kämpfe, Martina & Knedlik, Tobias, 2017. "The appropriateness of the macroeconomic imbalance procedure for Central and Eastern European countries," IWH Discussion Papers 16/2017, Halle Institute for Economic Research (IWH).
    4. repec:prg:jnlpep:v:preprint:id:530:p:1-15 is not listed on IDEAS
    5. Egert Juuse & Rainer Kattel, 2014. "Financialisation and the Financial and Economic Crises: The Case of Estonia," FESSUD studies fstudy20, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.
    6. Vollmer Uwe, 2016. "The Asymmetric Implementation of the European Banking Union (EBU): Consequences for Financial Stability," International Journal of Management and Economics, De Gruyter Open, pages 7-26.

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