Financial instability, institutional development and economic crisis in Eastern Europe
-
DOIhttp://dx.doi.org/10.21511/imfi.16(3).2019.16
-
Article InfoVolume 16 2019, Issue #3, pp. 167-181
- Cited by
- 2213 Views
-
802 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
This paper sheds light on the financial crisis of 2008–2010 in eleven emerging Eastern European economies (EE11): Armenia, Azerbaijan, Belarus, Bulgaria, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Romania, Tajikistan and Ukraine. The aim is twofold. In the first place it seeks to find out if the financial instability hypothesis, as put forward by Minsky and Kindleberger, is a valid explanatory factor for the crisis. Secondly, it tries to map if general institutional frameworks of these countries were developed in order to stand against the factors leading into the financial crisis.
To answer these research problems the paper maps cycles of three parameters representing the real economy, i.e. gross domestic product, manufacturing output and unemployment and four parameters representing the financial markets, i.e. money supply, credit volumes, inflation and government debt. The cycle approach is carried out with the help of a structural time series analysis to isolate cycles in time series. The paper concludes that there were substantial positive financial cycles previous to the financial crisis mirrored by similar cycles in the real economy.
Similarly, the results show negative cycles in the same parameters during the years of crisis. It seems that an uncontrolled increase in money and credit caused the economy to overheat and thereafter contract into financial and real economy crises.
Also, the paper compiles twelve different indices of institutional development. These are standardized and presented in an institutional development matrix, showing that the general institutional framework for the eleven economies was weak previous to and under the meltdown of the economies.
The construction of an integrated institutional development index on the basis of the same twelve parameters confirms institutional shortcomings, which may have made the economies less able to guard themselves from a crisis initiated by both domestically and internationally financial instability.
- Keywords
-
JEL Classification (Paper profile tab)E32, E44, E51, E52, G15
-
References38
-
Tables3
-
Figures5
-
- Figure 1. Seven-step dynamic model for financial crisis
- Figure 2. Institutional development matrix
- Figure 3. Institutional development charts
- Figure 4. Integrated institutional development index
- Figure 5. Plot diagram IIDI and GDP contraction during financial crisis
-
- Table 1. Cycle peaks before financial crises of 2008–2010 as natural logarithms
- Table 2. Cycle troughs during financial crises of 2008 as natural logarithms
- Table 3. Integrated institutional development index
-
- Åslund, A. (2010). The Last Shall Be the First. The East European Financial Crisis. Peterson Institute for International Economics.
- Åslund, A. (2018). What Happened to the Economic Convergence of Central and Eastern Europe after the Global Financial Crisis? Comparative Economic Studies, 60(2).
- Bracke, T., & Martin, R. (2012). From Crisis to Recovery: Old and New Challenges in Emerging Europe. Palgrave Macmillan.
- Cato Institute (2018). Economic freedom.
- Cato Institute (2016). Human freedom.
- Cerqueira, P., Silaghi, M. I. P., Stoian, A., & Turcu, C. (2018). Perspectives on Financial, Monetary, and Economic Developments in Eastern Europe. Eastern European Economics, 56(5), 329-333.
- Claessens, S., & Kose, M. A. (2013). Financial Crises Explanations, Types and Implications. IMF Working Papers, 13/28.
- Doing business (2018). A World Bank Group Flagship.
- Dubravko, M. (2011). The Spread of the Financial Crisis to Central and Eastern Europe: Evidence from the BIS Data. In R. Matousek (Ed.), Money, Banking and Financial Markets in Central and Eastern Europe. 20 years of transition (pp. 5-31). Palgrave Macmillan.
- Dudáš, T. (2013). The impact of the global economic crisis on the public finances of Central and Eastern European countries. Niğde Üniversitesi İİBF Dergisi, 6(2), 184-193.
- Eichengreen, B. (1990). Elusive Stability. Essays in the History of International Finance 1919–1939. Cambridge University Press. Cambridge Mass.
- Fund for Peace (2018). Fragile states index.
- Goldsmith, R. W. (1982). Comment on Hyman P Minsky. The Financial Instability Hypothesis. In C. P. Kindleberger & Laffargue (Eds.), Financial Crises, Theory, History and Policy (pp. 41-43). Cambridge UK.
- Grytten, O. H., & Hunnes, A. (2016). Krakk og Kriser ihistorisk perspektiv (pp. 21-34). Oslo: Cappelen Damm.
- Jungmann, J., & Sagemann, B. (2011). Financial Crisis in Eastern Europe. Road to Recovery. Gabler.
- Kindleberger, C. P. (1996). Mnias, Panics and Crashes (3rd ed.). Wiley, Hobokoen New Yersey.
- Kindleberger, C. P., & Aliber, R. Z. (2015). Manias, Panics and Crashes. A History of Financial Crises (7th ed.). Palgrave Macmillan.
- Kydland, F. E., & Prescott, E. C. (1990). Business cycles: real facts and a monetary myth. Quarterly Review. Federal Reserve Bank of Minneapolis, 3-18.
- Minsky, H. P. (1982). The Financial Instability Hypothesis: Capitalist Processes and the Behaviour of the Economy. In C. P. Kindleberger & J. P. Laggargue (Eds.), Financial Crises: Theory, History, and Policy (pp. 13-39). Cambridge University Press.
- Minsky, H. P. (1986). Stabilizing an Unstable Economy. Yale University Press, Yale.
- Moghadam, R. (2014). Democracy. Europe’s Road to Integration. Finance and Development, 51(1), 8-13.
- Njemcevic, F. (2017). Capital Market and Economic Growth in Transition Countries: Evidence from South East Europe. Journal of International Business Research and Marketing, 2(6), 15-22.
- Reinhart, C. M., & Rogoff, K. S. (2009). This Time Is Different. Eight Centuries of Financial Folly. Princeton University Press.
- Riaz, S. (2009). The global financial crisis: an institutional theory analysis. Critical Perspectives on International Business, 5(1-2), 26-35.
- Roaf, J., Atoyan, R., Joshi, B., & Krogulski, K. (2014). 25 Years of Transition Post-Communist Europe and the IMF. Regional Economic Issues Special Report and an IMF Staff Team, IMF.
- Roth, F., & Jonung, L. (2019). Public Support for the Euro and Trust in the ECB: The first two decades of the common currency (Conference Paper: The Economics of Monetary Unions. Past Experience and the Eurozone).
- Stroe, M. A. (2011). Impact of the financial crisis upon Eastern Europe countries: Still a problem for the Economy of the region? Challenges of the Knowledge Society, 1(1), 1547-1552.
- The Economist Intelligence Unit (2017). Democracy.
- The Global Economy (2017). Political stability index.
- The World Bank (n.d.). World Bank Open Data.
- The World Economic Forum (2018). Gender gap.
- Tornell, A., & Westermann, F. (2005). Boom-Bust Cycles and Financial Liberalization. CESifo.
- Transparency International (2017). Corruption perception.
- Turk, Z. (2014). Central and Eastern Europe in Transition: An Unfinished Process? European View, 13(2), 199-208.
- United Nations Development Programme (2017). Gender inequality.
- United Nations Development Programme (2017). HDI.
- Yale Center for Environmental Law and Policy (2018). Environment health.
- Yale Center for Environmental Law and Policy (2018). Environment Performance Index.