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Capital Flows, Credit Crunch and Deleveraging Dynamics: The Case of Slovenia, Croatia and Hungary in Comparison


  • Vidakovic, Neven
  • Zbašnik, Dušan


This paper investigates the deleveraging process in three neighboring countries: Slovenia, Croatia and Hungary. Prior to the economic crisis of 2008 all three countries have experienced solid rates of economic growth, economic stability, but also fast rise of foreign debt. After 2008 all three countries are faced with a prolonged recession and without long term sustainable sources of growth. This paper looks at the effects of capital flow into three economies, determines the reasons for the increase in foreign debt and investigates the policy response. Paper finds that each of the three countries had different reason for the increase in foreign debt, but the economic effects are the same: prolonged macroeconomic instability and recession. In order to cover both economic theory and real economic effects authors use a modified version of the RBC model with soft budget constraint and free capital flows. The model does to some extent explain the effects leveraging process has had on the three economies. In the end paper investigates what was the role of the central bank in controlling the increase in foreign debt and concludes the role of central bank has to be augmented for control of capital flows in order to avoid crisis like the one started in 2008.

Suggested Citation

  • Vidakovic, Neven & Zbašnik, Dušan, 2014. "Capital Flows, Credit Crunch and Deleveraging Dynamics: The Case of Slovenia, Croatia and Hungary in Comparison," MPRA Paper 63958, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:63958

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    1. Carlos Cuerpo & Inês Drumond & Julia Lendvai & Peter Pontuch & Rafal Raciborski, 2013. "Indebtedness, Deleveraging Dynamics and Macroeconomic Adjustment," European Economy - Economic Papers 2008 - 2015 477, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
    2. Mihály Hoffmann & Balázs Kóczián & Péter Koroknai, 2013. "Developments in the external balance of the Hungarian economy: indebtedness and adjustment," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 8(Special), pages 69-80, October.
    3. Péter Bauer & Mariann Endrész & Regina Kiss & Zsolt Kovalszky & Ádám Martonosi & Olivér Rácz & István Schindler, 2013. "Excessive household debt: causes, trends and consequences," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 8(Special), pages 28-36, October.
    4. Peter Mihalyi, 2011. "Inflation Rather Than Austerity - Hungary's Economic Strategy," CASE Network E-briefs 03, CASE-Center for Social and Economic Research.
    5. András Komáromi, 2008. "The structure of external financing: Is there a reason to worry about financing through debt?," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 3(1), pages 14-23, April.
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    More about this item


    deleveraging; monetary policy; real business cycle; capital flows;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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