Towards a typology for systemic financial instability

This article seeks to provide a categorisation of events of systemic financial instability that have been experienced in recent decades, seeking to draw out common elements from these seemingly-diverse events. We maintain that despite the apparent diversity of events of financial instability, a useful summary categorisation is between bank, market-price and market-liquidity based crises. There are important subcategories of each type, such as domestic versus international, currency crisis linked, single-institution based, equity-related, property, commodities, deregulation and disintermediation linked crises. Such financial crises are usefully examined in the light of the theories of financial instability, not least to illuminate common generic patterns that can be helpful in macroprudential surveillance. We derive a framework for analysing the evolution of such crises, highlighting that it is vulnerability of a financial system that is the key common element to a crisis, besides the nature of propagation of a crisis to the wider economy. Besides having general applicability, notably to OECD countries, the typology and generic features have some relevant implications for euro area countries. Development of securities markets, the likelihood of regional crises and the likely impact of ageing are among aspects that warrant vigilance by policy makers in the euro zone

The role of pension funds as institutional investors in emerging markets

In recent years, a growing number of Emerging Market Economies, as well as most advanced countries, have witnessed growth of pension funds as institutional investors. This has often occurred in the wake of pension reform shifting retirement income provision from pay-as-you-go to funding. The ongoing ageing of the population and financing difficulties of pay-as-you-go systems suggests that such reforms will become yet more common in the future. Accordingly, it is important to analyse the impact of institutional investment on the economy. In this context, our aim is to address the role of pension funds as institutional investors in financial development, and the wider effects of such financial development on economic performance. We note inter alia some of the ways in which the behaviour and impact of institutional investors might differ in emerging market economies from advanced countries as well as policy issues

Energy Alarmism: The Myths That Make Americans Worry about Oil

Many Americans have lost confidence in their country's "energy security" over the past several years. Because the United States is a net oil importer, and a substantial one at that, concerns about energy security naturally raise foreign policy questions. Some foreign policy analysts fear that dwindling global oil reserves are increasingly concentrated in politically unstable regions, and they call for increased U.S. efforts to stabilize -- or, alternatively, democratize -- the politically tumultuous oil-producing regions. Others allege that China is pursuing a strategy to "lock up" the world's remaining oil supplies through long-term purchase agreements and aggressive diplomacy, so they counsel that the United States outmaneuver Beijing in the "geopolitics of oil." Finally, many analysts suggest that even the "normal" political disruptions that occasionally occur in oil-producing regions (e.g., occasional wars and revolutions) hurt Americans by disrupting supply and creating price spikes. U.S. military forces, those analysts claim, are needed to enhance peace and stability in crucial oil-producing regions, particularly the Persian Gulf. Each of those fears about oil supplies is exaggerated, and none should be a focus of U.S. foreign or military policy. "Peak oil" predictions about the impending decline in global rates of oil production are based on scant evidence and dubious models of how the oil market responds to scarcity. In fact, even though oil supplies will increasingly come from unstable regions, investment to reduce the costs of finding and extracting oil is a better response to that political instability than trying to fix the political problems of faraway countries. Furthermore, Chinese efforts to lock up supplies with long-term contracts will at worst be economically neutral for the United States and may even be advantageous. The main danger stemming from China's energy policy is that current U.S. fears may become a self-fulfilling prophecy of Sino-U.S. conflict. Finally, political instability in the Persian Gulf poses surprisingly few energy security dangers, and U.S. military presence there actually exacerbates problems rather than helps to solve them. Our overarching message is simply that market forces, modified by the cartel behavior of OPEC, determine most of the key factors that affect oil supply and prices. The United States does not need to be militarily active or confrontational to allow the oil market to function, to allow oil to get to consumers, or to ensure access in coming decades

Globalization and national development at the end ot the 20th century - tensions and challenges

Globalization offers developing countries the opportunities to create wealth through export-led growth, to expand international trade in goods and services, and to gain access to new ideas, technologies, and institutional designs. But globalization also entails problems and tensions that must be appropriately managed. For one thing, global business cycles can contribute greatly to macroeconomic volatility at the national level. The scope and severity of crises in Mexico (1994-95), Asia (1997), Russia (1998), and Brazil (1999) suggests the severity of the financial vulnerability developing countries face nowadays. With financial markets so highly integrated, problems are transmitted rapidly from one country to another. The rapid transmission of financial shocks changes levels of confidence and affects exchange rates, interest rates, asset prices, and, ultimately, output and employment - with consequent social effects. Policymakers should also be concerned about how globalization exacerbates job instability and income disparities both within and across countries. Macroeconomic and financial crises, by increasing poverty and social tensions, can be political destabilizing. As the 20th century ends, the resources of Bretton Woods institutions are strained because of the large and complex rescue packages needed to deal with large-scale volatility. Development policy agendas in the era of globalization need to articulate traditional concerns with growth, stability, and social equity with new themes such as transparency and good governance at several levels: national, regional, and global.Environmental Economics&Policies,Payment Systems&Infrastructure,Economic Theory&Research,Financial Intermediation,Fiscal&Monetary Policy,Governance Indicators,Banks&Banking Reform,Environmental Economics&Policies,Economic Theory&Research,Financial Intermediation

Critical Market Crashes

This review is a partial synthesis of the book ``Why stock market crash'' (Princeton University Press, January 2003), which presents a general theory of financial crashes and of stock market instabilities that his co-workers and the author have developed over the past seven years. The study of the frequency distribution of drawdowns, or runs of successive losses shows that large financial crashes are ``outliers'': they form a class of their own as can be seen from their statistical signatures. If large financial crashes are ``outliers'', they are special and thus require a special explanation, a specific model, a theory of their own. In addition, their special properties may perhaps be used for their prediction. The main mechanisms leading to positive feedbacks, i.e., self-reinforcement, such as imitative behavior and herding between investors are reviewed with many references provided to the relevant literature outside the confine of Physics. Positive feedbacks provide the fuel for the development of speculative bubbles, preparing the instability for a major crash. We demonstrate several detailed mathematical models of speculative bubbles and crashes. The most important message is the discovery of robust and universal signatures of the approach to crashes. These precursory patterns have been documented for essentially all crashes on developed as well as emergent stock markets, on currency markets, on company stocks, and so on. The concept of an ``anti-bubble'' is also summarized, with two forward predictions on the Japanese stock market starting in 1999 and on the USA stock market still running. We conclude by presenting our view of the organization of financial markets.Comment: Latex 89 pages and 38 figures, in press in Physics Report