| Abstract: |
This paper provides a unified analysis for the onset of the 1998 financial
crisis and the strong economic recovery afterward in Russia and other former
Soviet Union countries. Before the crisis a banking failure arose owing to the
coexistence of a lemons credit market and high government borrowing. In a
lemons credit market low credit risk firms switched from bank to nonbank
finance, including trade credits and barter trade, generating an externality
on banks’ interest rates. The collapse of the treasury bills market in the
financial crisis triggered a change in banks’ lending behavior, providing
initial conditions for banking development. |