Financial crises after financial liberalization: Exceptional circumstances or structural weakness?

Recent studies have conjectured that there may be a link between financial liberalization and financial instability in emerging economies. Most of these studies, however, do not investigate whether emerging economies are becoming structurally more vulnerable to currency and banking crises. In this paper, we argue that emerging economies are systematically becoming more susceptible to both currency and banking crises after FL. Using data for 27 emerging economies from 1973 to the present, univariate and multivariate analyses indicate that the likelihood of currency crises and banking crises increase after FL. In particular, liberalization allows more liquidity to enter an emerging economy, which finds its way into productive and speculative projects. What is common to both types of crises is a significant increase in speculative financing, thereby increasing the chance for borrower default. Thus, the outflow of international capital becomes more likely, and we find that the chance of either type of crisis grows faster in response to changes in short-term loans after FL than before. Similarly, the reactions to overvalued currencies are at least similar in terms of increasing probabilities of crises in the case of banking crises, or greater in the case of currency crises after FL as compared to before FL. Further, our results show that after FL the chance of a currency crisis declines over time, while the chance of a banking crisis increases. --Emerging economies,Financial liberalization,financial instability,currency crises,banking crises

The economics of rating watchlists: evidence from rating changes

Generally, information provision and certification have been identified as the major economic functions of rating agencies. This paper analyzes whether the “watchlist" (rating review) instrument has extended the agencies' role towards a monitoring position, as proposed by Boot, Milbourn, and Schmeits (2006). Using a data set of Moody's rating history between 1982 and 2004, we find that the overall information content of rating action has indeed increased since the introduction of the watchlist procedure. Our findings suggest that rating reviews help to establish implicit monitoring contracts between agencies and borrowers and as such enable a finer partition of rating information, thereby contributing to a higher information quality

Could International Labor Rights Play a Role in U.S. Trade?

During its last complete business cycle, from 2001 to 2007, the United States experienced unsustainably high trade deficits. Policymakers are considering a number of measures to avoid a recurrence of such large external imbalances. One such measure is the promotion of better labor rights around the world. Proponents argue that higher labor standards would boost U.S. exports by increasing income growth abroad and reduce U.S. imports by shrinking international price differences. Opponents of such a policy move argue that it is disguised protectionism that will impede trade and harm living standards in the United States and abroad. In this paper, Weller combines U.S. trade data with data on international labor standards and other relevant economic variables to study if there is a link between labor rights abroad and U.S. trade. The results suggest that the United States would have benefited from more exports if there had been better worker rights around the world, while labor rights would not have had any measurable impact on U.S. imports. That is, the promotion of better worker rights around the world could contribute to fewer external imbalances without impeding international trade flows.U.S. trade deficit; labor rights; relative price differences

The connection between more multinational banks and less real credit in transition economies

The number of multinational banks have increased in transition economies in Central and Eastern Europe, while the amount of real credit has simultaneously decreased. Based on the cases of Poland and Hungary during the first six years of economic transition this paper investigates if there is a link between greater international financial competition and less real credit. I provide a theoretical argument that connects the number of multinational banks to the availability of capital for domestic banks, and hence to their lending capacity. In support of this argument, I employ data from both countries' central banks, central statistical offices, and private institutions, as well as from international institutions, such as IMF and BIS. The evidence suggests that the increases in efficiency which result from greater competition do not outweigh the limitations on the capital base of domestic banks. Consequently, I find that the constraints that international financial competition places on domestic banks to raise their capital leads them to reduce their commercial lending activities in the early stages of financial liberalization. --

The interaction of spatially modulated vortex pairs with free surfaces

Spatially modulated vortex pairs were generated below a free surface by two counter-rotating flaps whose edges approximate a sinusoid. The surface interactions of the vertically approaching vortex pairs were visualized by the shadowgraph technique. Two limiting cases were investigated in detail: the interaction with a surfactant-rich (contaminated) surface and with a surfactant-poor (‘clean’) surface. In the latter case shadowgraph images showed that the underlying vortex core formed a line of circular surface depressions. Subsequent measurements of the temporally evolving velocity fields using digital particle image velocimetry (DPIV) of the vortex pair cross-sections and the subsurface plane confirmed the connection process of the main vortex core with the surface. As a result of the connection the initially modulated vortex tube was broken into a line of U-vortices. In the presence of surfactants this connection could not be observed; rather a Reynolds ridge (or stagnation line) was formed and a very weak connection of the secondary separation vortex could be seen in the shadowgraphs as well as measured with the time-resolved DPIV technique. A prerequisite for connection of the vortex with the surface is that the flow's kinematics force the vortex core, that is, regions of concentrated vorticity, toward the surface. The ensuing locally concentrated viscous flux of surface-parallel vorticity through the surface is balanced by a local surface deceleration. Surface-normal vorticity appears on each side of the decelerated region whose gradually increasing circulation is directly balanced by the loss of circulation of the surface-parallel vortex. However, the shear forces caused by small amounts of surface contamination and its associated subsurface boundary layer inhibit the connection process by preventing the essential viscous flux of parallel vorticity through the surface. Instead, the subsurface boundary layer is associated with a flux of parallel vorticity into the surface which then concentrates into the observable secondary separation vortex

Have Differences in Credit Access Diminished in an Era of Financial Market Deregulation?

Over the past few decades, financial markets have become increasingly deregulated and household debt has expanded, sometimes rapidly. It is possible that greater deregulation led to improved credit access--measured by loan denials, discouraged applications, and costs of credit-- for typically underserved groups, such as minorities and low-income families, relative to their counterparts. Data from the Federal Reserve’s Survey of Consumer Finances however, shows no clear trend towards equalization of credit access from 1989 to 2004. While there were some gains by specific groups by certain measures (for example, the gaps in loan denials and discouraged applications improved for Hispanics, relative to Whites), the results indicate that differences in credit access did not decrease on a broad basis during a period of large scale financial deregulation.Household debt; credit access; costs of debt; interest rates; financial deregulation

Did Retirees Save Enough to Compensate for the Increase in Individual Risk Exposure?

The United States experienced an unprecedented financial crisis after 2007. This paper analyzes if retirees had enough wealth built up to weather the financial risks that materialized in the crisis. Financial risks associated with saving for retirement had increasingly shifted onto individuals away from the public and employers during the decades before the crisis. This growing personal responsibility should have gone along with more saving and less risk taking.�This Working Paper uses data from the Federal Reserve’s triennial Survey of Consumer Finances to first define an income threshold for retirees, specifically whether annuity income is greater than twice the poverty line – a common proxy for basic income needs. Weller then calculates the potential retirement income that retirees could expect if they translated all of their wealth into income and if the income is adjusted for market, idiosyncratic, and longevity risks. He compares the potential risk-adjusted income for retirees with annuity income above twice the poverty line to those retirees with annuity income below twice the poverty line. Both groups of retirees should have at least the same level of risk-adjusted potential retirement income. This comparison shows, however, that retirees with annuity income below twice the poverty line did not build up sufficient wealth to compensate for the rising financial risk exposure. Public policy thus should maintain existing sources of annuity income, promote greater annuitization of financial wealth, and encourage additional savings. �Retirement income adequacy; personal saving; financial risks

The Recent Stock Market Fluctuations and Retirement Income Adequacy

This paper analyzes the effect of wealth fluctuations on retirement income adequacy between 1992 and 2001. In addition, the paper estimates how financial wealth relative to income may develop in the medium to long-term. The average household was adequately prepared for retirement, even after the decline in the stock market, if it is assumed that retirement income needs fall in real terms with age. But if a fixed real level of consumption is considered for retirement income adequacy, the average household was more likely inadequately prepared for retirement, even after wealth increased dramatically in the late 1990s. Moreover, on average households can only expect to reach their peak wealth to income levels again within the next 10 to 20 years if increases in personal savings rates or rates of return are assumed. Without such changes, it is also unlikely that households will be able, on average, to reach an adequate level of retirement savings, assuming that their income needs in retirement do not decline in real terms.