Financial Constraints in Transition Countries

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  2. Dr Roxana Radulescu
Author(s)Radulescu MR
Publication type Article
JournalNewcastle Discussion Papers in Economics
Year2009
Volume2009/10
Issue
Pages
ISSN (print)1361-1837
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What role do credit constraints have in transition economies? The existing literature suggests that credit constraints have become a problem after the fall of communism and do so mostly by showing that a relationship between cash flow and investment exists at the firm level. Few papers try to look in detail at the kind of credit constraints that the firms face and analyse their effect on firms’ activities. This paper uses firm level data to present evidence on the extent and impact of credit constraints in a large number of transition economies. The key finding is that the highest percentage of credit rationed firms is found in the CIS (25%), followed by CEE (18%) and then Western and Southern Europe (8%). It seems that credit constraints have an effect on firm investment, employment growth, technology and the upgrading of products, and this effect is stronger in the transition countries. These results have implications for monetary policy by providing evidence that the availability of bank lending matters for economic activity but this channel of transmission may be stronger in countries with less reformed banking systems. Results for non-transition economies suggest that as the transition countries continue their reform process the strength of this channel will decrease.
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