Phoenix from the Ashes: The Recovery of the Baltics from the 2008/2009 Crisis

Abstract

This paper argues that the deep bust and strong recovery of the Baltics were to large extent the result of the sharp adjustment the private sector was forced to go through between 2007 and 2009. When private capital flows suddenly stopped, firms were forced to quickly reduce their net lending gap. They slashed investment and cut costs, including by shedding labor. This led to a deep recession, but also to a sharp improvement in profitability and competitiveness, which set the stage for a subsequent export boom.

Keywords: Baltics, Crisis, Boom-bust, Sudden stop, Capital flows, Currency board