Liquidity problems and policy implications during the recent financial crisis in the Baltic-Scandinavian region: ex ante empirical study. Likviidsusprobleemid ning nende majanduspoliitiline käsitlus viimase finantskriisi ajal Balti ja Skandinaavia regioon

Abstract

This article provides an empirical examination of the development and determinants of the liquidity position in the financial sector during the past financial crises in the Baltic-Scandinavian region. We look at fiscal and monetary policy implications of the liquidity problems arising in the crisis, using panel data from Datastream and IFS data collection. The results are consistent with the theoretical predictions for a small open economy with the expected sign of changes and developments in common economic indicators. The main finding is that the changes (and the speed of changes) of interest rates, GDP and money supply have occurred relatively fast, meaning that the rising area of the LM-curve has been shorter than theory would predict. Market reactions took place quickly and relatively simultaneously – there was no time for the slow restructuring, thus liquidity needs were higher than generally. The impact of crises on the liquidity position of the financial sector is also studied.