Two crises, two responses

The crisis in Greece presents an extraordinary test for the euro, but also an opportunity to strengthen, and apply more diligently, existing procedures governing the economic and monetary Union. This Policy Brief authored by Bruegel Director Jean Pisani-Ferry, Senior Fellow André Sapir and Resident Fellow Benedicta Marzinotto emphasises the need for a more nuanced understanding of the different kinds of crises affecting euro members. Using Spain and Greece as examples, this paper makes policy recommendations for both scenarios. It explains how budgetary surveillance can be strengthened to prevent crises. It says the scope of Article 143 of the Lisbon Treaty should be extended and a clear and predictable conditional assistance regime put in place for effective crises management in the euro area.

Real Output Costs of Financial Crises: A Loss Distribution Approach

We study cross-country GDP losses due to financial crises in terms of frequency (number of loss events per period) and severity (loss per occurrence). We perform the Loss Distribution Approach (LDA) to estimate a multi-country aggregate GDP loss probability density function and the percentiles associated to extreme events due to financial crises. We find that output losses arising from financial crises are strongly heterogeneous and that currency crises lead to smaller output losses than debt and banking crises. Extreme global financial crises episodes, occurring with a one percent probability every five years, lead to losses between 2.95% and 4.54% of world GDP.Comment: 31 pages, 10 figure

Synchronisation of financial crises

This paper develops concordance indices for studying the simultaneous occurrence of financial crises. The indices are designed to cope with these typically low incidence events. This leads us to confine attention to non-tranquil periods to develop a bivariate index and its multivariate analog for potentially serially correlated categorical data. An application to the Bordo et al. (2001) data set reveals the extent of concordance in banking and currency crises across countries. The internationalisation of financial crises in the 20th century is shown to have increased for currency crises and decreased for banking crises

The Impact of Financial Crises on the Informal Economy: The Turkish Case

Turkey has a large informal economy and has been hit by severe financial crises causing a devastating impact on its economy. The main objective of this paper is to analyse the impact of financial crises on the informal economy in Turkey. We distinguish between four types of financial crises that make up or aggregate financial crises: internal, external, currency and banking crises. Using vector autoregression (VARX) in the presence of two key variables (the financial crisis and the informal economy), we conduct annual time series analysis from 1980 to 2011 and estimate the response of the informal economy to each type of crisis. To our knowledge, this is the first empirical study to examine the effects of financial crises on the informal economy in the context of the Turkish economy. The results show that each type of crisis produces a significantly positive response to the informal economy. In particular, the findings of this paper show that financial crises tend to have a permanent positive effect on the informal economy, suggesting that the informal economy is an important buffer, which tends to expand in times of crises in Turkey

Banking Crises Yesterday and Today

Provides an overview of the history of banking crises, as distinguished from financial crises, and the role of microeconomic and regulatory policy, both as causes of and as responses to the crises. Examines how politics can limit improved regulation

Quantitative analysis of crisis: crisis identification and causality

Studies use different conceptual and operational definitions of crises. The different crisis identifications can lead to inconsistent conclusions and policy formulation even if the same analytical framework is applied. Also, most studies focus on only a few types of crises. This narrow focus on crises may not capture the multidimensionality of crises. Seven crisis types are analyzed, namely (1) liquidity type banking crises, (2) solvency type banking crises, (3) balance of payments crises, (4) currency crises, (5) debt crises, (6) growth rate crises, and (7) financial crises. Crisis data were collected from 15 emerging economies in 1980-2002 on a quarterly basis. The crisis identification exercise finds that multidimensionality in which different crisis types occur in short periods is one of the most important characteristics of recent crises. Further, the Granger causality tests in five Asian economies (Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand) find that currency crises tend to trigger other types of crises, and therefore exchange rate management is essential.Governance Indicators,Economic Theory&Research,Macroeconomic Management,Banks&Banking Reform,Financial Crisis Management&Restructuring

Costly financial crises

This paper presents a model consistent with the business cycle view of the origins of banking panics. As in Allen and Gale [1], bank runs arise endogenously as a consequence of the standard deposit contract in a world with aggregate uncertainty about asset returns. The purpose of the paper is to show that Allen and Gale's result about the optimality of bank runs depends on individuals's preferences. In a more general framework, considered in the present work, a laisse-faire policy can never be optimal, and therefore, regulation is always needed in order to achieve the first best. This result supports the traditional view that bank runs are costly and should be prevented with regulation

Crises and Tax

How can law best mitigate harm from crises like storms, epidemics, and financial meltdowns? This Article uses the law and economics framework of property rules and liability rules to analyze crisis responses across multiple areas of law, focusing particularly on the ways the Internal Revenue Service (IRS) battled the 2008–09 financial crisis. Remarkably, the IRS’s responses to that crisis cost more than Congress’s higher-profile bank bailouts. Despite their costs, many of the IRS’s responses were underinclusive, causing preventable layoffs and foreclosures. This Article explains these failures and demonstrates that the optimal response to crises is to shift from harsh property rules to compensatory liability rules, temporarily. Arranging such a shift in advance further mitigates harm when crises arrive. This analysis also provides new insights for the broader literature on property rules and liability rules. For example, arranging in advance for temporary moves to liability rules during crises can avoid windfalls, allow speedier relief, and encourage flexible private contracts. These lessons have practical applications in areas as far afield as how constitutional law and patent law respond to epidemics

Indicators of financial crises do work! An early-warning system for six Asian countries

Indicators of financial crisis generally do not have a good track record. This paper presents an early warning system for six countries in Asia, in which indicators do work.We distinguish three types of financial crises, currency crises, banking crises and debt crises, and extract four groups of indicators from the literature—external, financial, domestic (real and public), and global indicators—that are likely to affect the probability of financial crises. The significance of the indicator groups is tested in a multivariate logit model on a panel of six Asian countries for the period 1970:01-2001:12. An additional feature is that we examine four different currency crisis dating definitions. A within-sample signal extraction experiment reveals that some currency crises dating schemes outperform others.financial crises, currency crises, banking crises, debt crises, early warning system, panel data, multivariate logit, factor analysis

Indicators of financial crises do work! An early-warning system for six Asian countries

Indicators of financial crisis generally do not have a good track record. This paper presents an early warning system for six countries in Asia, in which indicators do work.We distinguish three types of financial crises, currency crises, banking crises and debt crises, and extract four groups of indicators from the literature—external, financial, domestic (real and public), and global indicators—that are likely to affect the probability of financial crises. The significance of the indicator groups is tested in a multivariate logit model on a panel of six Asian countries for the period 1970:01-2001:12. An additional feature is that we examine four different currency crisis dating definitions. A within-sample signal extraction experiment reveals that some currency crises dating schemes outperform others.financial crises, currency crises, banking crises, debt crises, early warning system, panel data, multivariate logit, factor analysis