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

Optimal Financial Crises

Empirical evidence suggests that banking panics are a natural outgrowth of the business cycle. In other words panics are not simply the result of "sunspots" or self-fulfilling prophecies. Panics occur when depositors perceive that the returns on the bank's assets are going to be unusually low. In this paper we develop a simple model of this type of panic. In this setting bank runs can be incentive-efficient: they allow more efficient risk sharing between depositors who withdraw early and those who withdraw late and they allow banks to hold more efficient portfolios. Central bank intervention to eliminate panics can lower the welfare of depositors. However there is a role for the central bank to prevent costly liquidation of real assets by injecting money into the banking system during a panic.

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

International Financial Crises

Our friend and colleague Rüdiger Dornbusch passed away before he was able tocomplete his book based on the Munich Lectures in Economics that he gave inNovember 17, 1998, at the Center for Economic Studies of Ludwig-Maximilians-Universität.The lectures contain a fascinating overview of the mechanics andhistory of international financial crises showing the breadth and ingenuity of thiseminent scholar. The lectures were lively and provocative, full of importantinsights and observations. Interestingly enough, Dornbusch expressed asubstantial mistrust in the actions of political decision makers, supervisoryagencies and central banks in the game that leads to the crisis and even collapse offinancial systems, and he advocated supranational supervisory actions as aremedy. CES has decided to prepare a transcript of the lectures, which are also available inthe Internet as full length-videos. I am grateful to Paul Kremmel for hisassistance.

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

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

"Orthodox versus Heterodox (Minskyan) Perspectives of Financial Crises: Explosion in the 1990s versus Implosion in the 2000s"

Orthodox and heterodox theories of financial crises are hereby compared from a theoretical viewpoint, with emphasis on their genesis. The former view (represented by the fourth-generation models of Paul Krugman) reflects the neoclassical vision whereby turbulence is an exception; the latter insight (represented by the theories of Hyman P. Minsky) validates and extends John Maynard Keynes's vision, since it is related to a modern financial world. The result of this theoretical exercise is that Minsky's vision represents a superior explanation of financial crises and current events in financial systems because it considers the causes of financial crises as endogenous to the system. Crucial facts in relevant financial crises are mentioned in section 1, as an introduction; the orthodox models of financial crises are described in section 2; the heterodox models of financial crises are outlined in section 3; the main similarities and differences between orthodox and heterodox models of financial crises are identified in section 4; and conclusions based on the information provided by the previous section are outlined in section 5. References are listed at the end of the paper.John Maynard Keynes; Hyman P. Minsky; Paul Krugman; Financial Crises; Financial Fragility; Asset Bubbles; Speculation

Lessons from the East Asian experience: opening address

Financial crises ; Monetary policy ; Bank supervision ; Financial crises - Asia

Financial Crises and Climate Change

We empirically assess by means of the local projection method, the impact of financial crises on climate change vulnerability and resilience. Using a new dataset covering 178 countries over the period 1995–2017, we observe that resilience to climate change shocks has been increasing and that advanced economies are the least vulnerable. Our econometric results suggest that financial crises (particularly systematic banking ones) tend to lead to a short-run deterioration in a country´s resilience to climate change. This effect is more pronounced in developing economies. In downturns, if an economy is hit by a financial crisis, climate change vulnerability increases. Results are robust to several sensitivity checks.info:eu-repo/semantics/publishedVersio

Social Security Financial Crises

This paper explores the causes of the social security financial crises. We indicate that the financial crisis might be endogenous to the social security system. The main idea is that the PAYG social security system might affect fertility and human capital's decisions and therefore, may negatively impact the aggregated growth rate of the economy. These effects lead to an endogenous erosion of the financial basis of the PAYG social security program so that, as a consequence, the PAYG system is not sustainable and it requires continuous increases in the social security tax rate.Pay-as-you-go social security, demographic transition, financial crisis