engleski

Capital Flows, Credit Crunch and Deleveraging Dynamics: The Case of Slovenia, Croatia and Hungary in Comparison

This paper investigates the deleveraging process in three neighboring countries: Slovenia, Croatia, and Hungary. Prior to the economic crisis of 2008, all three countries have experienced solid rates of economic growth, economic stability, but also the fast rise of foreign debt. After 2008 all three countries are faced with a prolonged recession and without long-term sustainable sources of growth. This paper looks at the effects of capital flow into three economies, determines the reasons for the increase in foreign debt, and investigates the policy response. Paper finds that each of the three countries had different reasons for the increase in foreign debt, but the economic effects are the same: prolonged macroeconomic instability and recession. In order to cover both economic theory and real economic effects, the authors use a modified version of the RBC model with soft budget constraints and free capital flows. The model does to some extent explain the effects the leveraging process has had on the three economies. In the end, the paper investigates what was the role of the central bank in controlling the increase in foreign debt and concludes the role of the central bank has to be augmented for control of capital flows in order to avoid a crisis like the one started in 2008.

deleveraging, monetary policy, real business cycle, capital flows

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