Central and Eastern European Countries in the Global Financial Crisis: A Typical Twin Crisis?

Posted: 1 Nov 2011 Last revised: 25 Nov 2011

See all articles by Diemo Dietrich

Diemo Dietrich

Newcastle University Business School

Tobias Knedlik

Fulda University of Applied Sciences; Halle Institute for Economic Research (IWH)

Axel Lindner

Halle Institute for Economic Research

Date Written: October 31, 2011

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 is 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 organized 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.

Keywords: twin crisis, global financial crisis, Central and Eastern European countries

JEL Classification: G21, F31

Suggested Citation

Dietrich, Diemo and Knedlik, Tobias and Lindner, Axel, Central and Eastern European Countries in the Global Financial Crisis: A Typical Twin Crisis? (October 31, 2011). Post-Communist Economies, Vol. 23, No. 4, pp. 415-432, Available at SSRN: https://ssrn.com/abstract=1951616

Diemo Dietrich (Contact Author)

Newcastle University Business School ( email )

5 Barrack Road
Newcastle-upon-Tyne NE1 7RU, NE1 4SE
United Kingdom

HOME PAGE: http://www.ncl.ac.uk/business-school/staff/profile/diemodietrich.html

Tobias Knedlik

Fulda University of Applied Sciences ( email )

Leipziger Straße 123
Fulda, 36037
Germany

Halle Institute for Economic Research (IWH) ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Axel Lindner

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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