Minskyan Liquidity Model Explanation of Financial Crisis in Emerging Europe
Similarly to the Asian tigers in the early 1990s, countries of emerging Europe served as a shining example of successful market reformers in policymaking and academic circles worldwide. Unfortunately, in 2007 appeared first signals of upcoming calamitous crisis when debtors in the U.S. subprime mortgage market started to declare bankruptcy. Consequently, several important financial institutions demised. First in the line was Bear Stearns closely followed by much larger financial players, Fannie Mae, Freddie Mac and AIG. In that way, credible threat of a systematic failure of the U.S. financial system escalated. In summer 2008, default of the Lehman Brothers, gigantic investment bank triggered a series of events that affected economies around the globe. The reason lied in the collapse of the money market especially commercial paper market since Lehman brothers failed to make good on its short-term debt. Consequently, panic spread out, the commercial-paper market seized up and banks and financial institutions around the world lost trust in one another causing short-term lending rates to spike. Jamming of money markets around the globe had strong negative effect on world production and trade. In late 2008, world trade was contracting at a 40 percent annual rate. World economy entered an era of the Great Recession.
Emerging European economies (EEE) were especially hit hard.Policymakers were stunned and surprised, as if no one expected financial disaster after several good years of expansion and prosperity. However, in this paper we claim that signs of looming crises were visible several years...
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