Finance and growth in economies in transition

The paper presents an analytical discussion and empirical evidence on the adjustment of financial markets to the stabilization and reforms implemented in a transition economy, emphasizing the role of liquidity constraints. Different types of equilibria, associated with different financial structures, can emerge after reforms. The paper argues that a key role during the transition is played by private, trade credit markets. The functioning of the latter requires the existence of a minimum set of market institutions, that can impose credible penalties and rewards for 'good' behavior.