E. Philip Davis
- Published in print:
- 1995
- Published Online:
- November 2003
- ISBN:
- 9780198233312
- eISBN:
- 9780191596124
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198233310.003.0008
- Subject:
- Economics and Finance, Financial Economics
Chapters 5 and 6 identified a number of features common to most periods of financial instability in recent decades; these observations were felt to validate to some extent the various theories of ...
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Chapters 5 and 6 identified a number of features common to most periods of financial instability in recent decades; these observations were felt to validate to some extent the various theories of financial crisis that have been proposed in the literature. On the other hand, not one theory was able to explain financial instability; features of several had to be jointly present in order for a situation of financial instability to arise. This chapter explores the hypothesis that many of the factors underlying heightened systemic risk can be adequately subsumed in an industrial organization framework, with particular reference to the role of an intensification of competition among financial intermediaries following market developments that reduce entry barriers. The approach seeks both to encompass the mechanisms highlighted by existing theories of financial crisis, particularly those relating to uncertainty and imperfect information, and also to extend them by focusing on certain structural aspects that have hitherto been generally neglected by theorists, and which can be discerned in many, if not all, cases of financial instability. (In other words, it seeks to complement and not substitute for the analysis of Chs. 5 and 6.). It is suggested that the hypothesis could provide additional policy recommendations and also useful leading indicators of financial instability as well as fragility, both for regulators and for market participants themselves.Less
Chapters 5 and 6 identified a number of features common to most periods of financial instability in recent decades; these observations were felt to validate to some extent the various theories of financial crisis that have been proposed in the literature. On the other hand, not one theory was able to explain financial instability; features of several had to be jointly present in order for a situation of financial instability to arise. This chapter explores the hypothesis that many of the factors underlying heightened systemic risk can be adequately subsumed in an industrial organization framework, with particular reference to the role of an intensification of competition among financial intermediaries following market developments that reduce entry barriers. The approach seeks both to encompass the mechanisms highlighted by existing theories of financial crisis, particularly those relating to uncertainty and imperfect information, and also to extend them by focusing on certain structural aspects that have hitherto been generally neglected by theorists, and which can be discerned in many, if not all, cases of financial instability. (In other words, it seeks to complement and not substitute for the analysis of Chs. 5 and 6.). It is suggested that the hypothesis could provide additional policy recommendations and also useful leading indicators of financial instability as well as fragility, both for regulators and for market participants themselves.
E. Philip Davis
- Published in print:
- 1995
- Published Online:
- November 2003
- ISBN:
- 9780198233312
- eISBN:
- 9780191596124
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198233310.001.0001
- Subject:
- Economics and Finance, Financial Economics
A remarkable feature of the period since 1970 has been the patterns of rapid and turbulent change in financing behaviour and financial structure in many advanced countries. These patterns have, in ...
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A remarkable feature of the period since 1970 has been the patterns of rapid and turbulent change in financing behaviour and financial structure in many advanced countries. These patterns have, in turn, often been marked by rising indebtedness, volatile asset prices, and periods of financial stress, whether in the non‐financial sector, the financial sector, or both. At the same time, the economics profession has seen a notable advance in the scope and depth of the theory of finance, particularly as it relates to the nature and behaviour of financial institutions and markets. In this context, the objective of the book is to explore, in both theoretical and empirical terms, the nature of the relationships in advanced industrial economies between levels and changes in borrowing (debt), vulnerability to default in the non‐financial sector (financial fragility), and widespread instability in the financial sector (systemic risk). The work seeks to provide a survey and critical assessment of the current economic theory relating to debt and financial instability to offer empirical evidence casting light on the validity of the theories, and it suggests a number of policy implications and lines of further research. Unlike most extant texts on these matters, which generally relate to one country's experience, the book focuses on the way similar patterns are observable in several countries—but not in others—as well as in the international capital markets themselves. Particular attention is paid to the importance of the nature and evolution of financial structure to the genesis of instability. Whereas a structural approach is common in analysis of comparative behaviour of financial systems—notably in corporate finance—its application to instability is relatively rare. Given the international scope of the analysis, the work is germane to understanding the behaviour of financial systems in all capitalist economies, as well as in the international capital markets. However, it is of particular relevance to analysis of the US, Japan, Germany, France, the UK, Canada, Sweden, Norway, Italy, and Australia, whose recent experience is analysed in some detail.Less
A remarkable feature of the period since 1970 has been the patterns of rapid and turbulent change in financing behaviour and financial structure in many advanced countries. These patterns have, in turn, often been marked by rising indebtedness, volatile asset prices, and periods of financial stress, whether in the non‐financial sector, the financial sector, or both. At the same time, the economics profession has seen a notable advance in the scope and depth of the theory of finance, particularly as it relates to the nature and behaviour of financial institutions and markets. In this context, the objective of the book is to explore, in both theoretical and empirical terms, the nature of the relationships in advanced industrial economies between levels and changes in borrowing (debt), vulnerability to default in the non‐financial sector (financial fragility), and widespread instability in the financial sector (systemic risk). The work seeks to provide a survey and critical assessment of the current economic theory relating to debt and financial instability to offer empirical evidence casting light on the validity of the theories, and it suggests a number of policy implications and lines of further research. Unlike most extant texts on these matters, which generally relate to one country's experience, the book focuses on the way similar patterns are observable in several countries—but not in others—as well as in the international capital markets themselves. Particular attention is paid to the importance of the nature and evolution of financial structure to the genesis of instability. Whereas a structural approach is common in analysis of comparative behaviour of financial systems—notably in corporate finance—its application to instability is relatively rare. Given the international scope of the analysis, the work is germane to understanding the behaviour of financial systems in all capitalist economies, as well as in the international capital markets. However, it is of particular relevance to analysis of the US, Japan, Germany, France, the UK, Canada, Sweden, Norway, Italy, and Australia, whose recent experience is analysed in some detail.
E. Philip Davis
- Published in print:
- 1995
- Published Online:
- November 2003
- ISBN:
- 9780198233312
- eISBN:
- 9780191596124
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198233310.003.0012
- Subject:
- Economics and Finance, Financial Economics
We seek in the conclusion to draw together the analysis of the book under four main headings, issues of finance (including equity finance, agency costs, and monetary policy issues), regulatory issues ...
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We seek in the conclusion to draw together the analysis of the book under four main headings, issues of finance (including equity finance, agency costs, and monetary policy issues), regulatory issues (including the safety net and prudential regulation) , financial structure and behaviour (including financial innovation and the industrial structure of financial markets), and prospects. The last named section suggested that, in our view, there are sufficient secular factors—notably competition, institutionalisation, securitisation, and the evolving role of banks to give grounds for expecting a permanent increase in financial instability. If correct, such a judgement makes development of a better understanding of the causes and consequences of financial fragility and financial instability all the more important, so as to provide macroprudential indicators of the risk of a future period of instability to governments, markets, and regulators.Less
We seek in the conclusion to draw together the analysis of the book under four main headings, issues of finance (including equity finance, agency costs, and monetary policy issues), regulatory issues (including the safety net and prudential regulation) , financial structure and behaviour (including financial innovation and the industrial structure of financial markets), and prospects. The last named section suggested that, in our view, there are sufficient secular factors—notably competition, institutionalisation, securitisation, and the evolving role of banks to give grounds for expecting a permanent increase in financial instability. If correct, such a judgement makes development of a better understanding of the causes and consequences of financial fragility and financial instability all the more important, so as to provide macroprudential indicators of the risk of a future period of instability to governments, markets, and regulators.
E. Philip Davis
- Published in print:
- 1995
- Published Online:
- November 2003
- ISBN:
- 9780198233312
- eISBN:
- 9780191596124
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198233310.003.0007
- Subject:
- Economics and Finance, Financial Economics
In this chapter, we test the theories of financial instability outlined in Ch. 5 against evidence from six periods of financial instability since 1973, namely the UK secondary banking crisis of ...
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In this chapter, we test the theories of financial instability outlined in Ch. 5 against evidence from six periods of financial instability since 1973, namely the UK secondary banking crisis of December 1973, the Herstatt crisis of June 1974, the advent of the LDC Debt Crisis in August 1982, the crisis in the FRN market of December 1986, the equity market crash of October 1987, and the US thrifts crises of the 1980s. Background on wholesale financial markets—in which most of the crises occurred—is provided in Sect. 1. In Sect. 2, the events of the periods of financial disorder are outlined. Three crises took place largely in international capital markets; one linked international and domestic and the other two were purely in domestic financial markets. Virtually all occurred in unregulated or liberalized financial markets. Section 3 sets these crises in the context of the long‐run behaviour of prices and quantities in the financial markets with a graphical illustration of the 1966–90 period. The behaviour of key economic indicators as well as market prices and quantities surrounding these events is examined in more detail in Sect. 4. These sections permit a qualitative evaluation in Sect. 5 of the theories of crisis; the results also cast light on the behaviour of financial markets under stress and give indications of appropriate policy responses.Less
In this chapter, we test the theories of financial instability outlined in Ch. 5 against evidence from six periods of financial instability since 1973, namely the UK secondary banking crisis of December 1973, the Herstatt crisis of June 1974, the advent of the LDC Debt Crisis in August 1982, the crisis in the FRN market of December 1986, the equity market crash of October 1987, and the US thrifts crises of the 1980s. Background on wholesale financial markets—in which most of the crises occurred—is provided in Sect. 1. In Sect. 2, the events of the periods of financial disorder are outlined. Three crises took place largely in international capital markets; one linked international and domestic and the other two were purely in domestic financial markets. Virtually all occurred in unregulated or liberalized financial markets. Section 3 sets these crises in the context of the long‐run behaviour of prices and quantities in the financial markets with a graphical illustration of the 1966–90 period. The behaviour of key economic indicators as well as market prices and quantities surrounding these events is examined in more detail in Sect. 4. These sections permit a qualitative evaluation in Sect. 5 of the theories of crisis; the results also cast light on the behaviour of financial markets under stress and give indications of appropriate policy responses.
E. Philip Davis
- Published in print:
- 1995
- Published Online:
- November 2003
- ISBN:
- 9780198233312
- eISBN:
- 9780191596124
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198233310.003.0006
- Subject:
- Economics and Finance, Financial Economics
Turning from financial fragility to systemic risk, the next two chapters seek to make an initial assessment of the causes, nature, and consequences of financial instability in contemporary financial ...
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Turning from financial fragility to systemic risk, the next two chapters seek to make an initial assessment of the causes, nature, and consequences of financial instability in contemporary financial markets by means of an examination of the features of six recent periods of financial disorder, in the light of the various theoretical approaches to financial crisis that have been proposed in the literature. To what extent did financial instability follow directly from financial fragility in the non‐financial sectors, with defaults by companies or households progressively weakening the balance sheets of financial institutions? Or were risks other than credit risk primarily responsible? Were the periods of financial instability ‘unique events’ or can common features be discerned? How well do the predictions of the theoretical paradigms fit the actual data? This chapter provides the theoretical background, while Ch. 6 offers an empirical assessment. We cover the financial fragility, monetarist, uncertainty, credit rationing/disaster myopia, and asymmetric information strands of the theory of financial instability.Less
Turning from financial fragility to systemic risk, the next two chapters seek to make an initial assessment of the causes, nature, and consequences of financial instability in contemporary financial markets by means of an examination of the features of six recent periods of financial disorder, in the light of the various theoretical approaches to financial crisis that have been proposed in the literature. To what extent did financial instability follow directly from financial fragility in the non‐financial sectors, with defaults by companies or households progressively weakening the balance sheets of financial institutions? Or were risks other than credit risk primarily responsible? Were the periods of financial instability ‘unique events’ or can common features be discerned? How well do the predictions of the theoretical paradigms fit the actual data? This chapter provides the theoretical background, while Ch. 6 offers an empirical assessment. We cover the financial fragility, monetarist, uncertainty, credit rationing/disaster myopia, and asymmetric information strands of the theory of financial instability.
Yilmaz Akyüz and Andrew Cornford
- Published in print:
- 2002
- Published Online:
- October 2011
- ISBN:
- 9780199254033
- eISBN:
- 9780191698187
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199254033.003.0005
- Subject:
- Economics and Finance, Development, Growth, and Environmental
A great many features of the current international financial system have a significant bearing on international capital flows. Thus, proposed reforms of this system can generally be expected to ...
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A great many features of the current international financial system have a significant bearing on international capital flows. Thus, proposed reforms of this system can generally be expected to affect the scale and character of these flows. The survey in this chapter concerns policies which have been at the centre of discussion since the East Asian crisis of 1997 but even so it is not comprehensive. This chapter reviews major features of developing countries' experience of external financing since the 1960s, paying special attention to shifts in the relative importance of private capital inflows and to their volatility. It contains a schematic account of the features of financial instability and crises, which is intended to serve as a backdrop for the policy discussion which follows and covers a selection of the policies. The policies in question include actions to be taken at both national and international levels as well as combinations of the two.Less
A great many features of the current international financial system have a significant bearing on international capital flows. Thus, proposed reforms of this system can generally be expected to affect the scale and character of these flows. The survey in this chapter concerns policies which have been at the centre of discussion since the East Asian crisis of 1997 but even so it is not comprehensive. This chapter reviews major features of developing countries' experience of external financing since the 1960s, paying special attention to shifts in the relative importance of private capital inflows and to their volatility. It contains a schematic account of the features of financial instability and crises, which is intended to serve as a backdrop for the policy discussion which follows and covers a selection of the policies. The policies in question include actions to be taken at both national and international levels as well as combinations of the two.
E. Philip Davis
- Published in print:
- 1995
- Published Online:
- November 2003
- ISBN:
- 9780198233312
- eISBN:
- 9780191596124
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198233310.003.0011
- Subject:
- Economics and Finance, Financial Economics
This chapter provides a selective summary of recent work in a number of areas relating to debt, fragility, and instability. First, four issues relating to bank debt are probed, namely real estate ...
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This chapter provides a selective summary of recent work in a number of areas relating to debt, fragility, and instability. First, four issues relating to bank debt are probed, namely real estate lending, pricing of risk, the putative decline of the banking sector, and the ’credit channel’ of monetary transmission. Following this, issues in securities markets relating to risk in derivatives, market liquidity risk, and the relation of institutional investors to financial instability are outlined. In a final section, the linking issue of risk in payments and settlements systems is considered. In each case, the aim is to provide the reader with a basic discussion of the relevant issues and with references for further reading on the topic concerned.Less
This chapter provides a selective summary of recent work in a number of areas relating to debt, fragility, and instability. First, four issues relating to bank debt are probed, namely real estate lending, pricing of risk, the putative decline of the banking sector, and the ’credit channel’ of monetary transmission. Following this, issues in securities markets relating to risk in derivatives, market liquidity risk, and the relation of institutional investors to financial instability are outlined. In a final section, the linking issue of risk in payments and settlements systems is considered. In each case, the aim is to provide the reader with a basic discussion of the relevant issues and with references for further reading on the topic concerned.
Barry Eichengreen
- Published in print:
- 1996
- Published Online:
- November 2003
- ISBN:
- 9780195101133
- eISBN:
- 9780199869626
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0195101138.003.0001
- Subject:
- Economics and Finance, Economic History
The gold standard is conventionally portrayed as synonymous with financial stability, and its downfall, starting in 1929, is implicated in the global financial crisis and the worldwide depression. A ...
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The gold standard is conventionally portrayed as synonymous with financial stability, and its downfall, starting in 1929, is implicated in the global financial crisis and the worldwide depression. A central message of this book is that precisely the opposite was true: far from being synonymous with stability, the gold standard itself was the principal threat to financial stability and economic prosperity between the World Wars I and II. To understand why, it is necessary first to appreciate why the interwar gold standard worked so poorly when its prewar predecessor had worked so well, next, to identify the connections between the gold standard and the Great Depression, and finally, to show that the removal of the gold standard in the 1930s established the preconditions for recovery from the Depression. These are the three tasks undertaken in the book (which is arranged chronologically), and they are summarized in the sections of this introductory chapter.Less
The gold standard is conventionally portrayed as synonymous with financial stability, and its downfall, starting in 1929, is implicated in the global financial crisis and the worldwide depression. A central message of this book is that precisely the opposite was true: far from being synonymous with stability, the gold standard itself was the principal threat to financial stability and economic prosperity between the World Wars I and II. To understand why, it is necessary first to appreciate why the interwar gold standard worked so poorly when its prewar predecessor had worked so well, next, to identify the connections between the gold standard and the Great Depression, and finally, to show that the removal of the gold standard in the 1930s established the preconditions for recovery from the Depression. These are the three tasks undertaken in the book (which is arranged chronologically), and they are summarized in the sections of this introductory chapter.
E. Philip Davis
- Published in print:
- 1995
- Published Online:
- November 2003
- ISBN:
- 9780198233312
- eISBN:
- 9780191596124
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0198233310.003.0005
- Subject:
- Economics and Finance, Financial Economics
Chapters 2 and 3 focused largely on the direct costs of financial fragility, namely increased business failures, household bankruptcies, and mortgage foreclosures. It was noted (Ch. 2, Sect. 3) that ...
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Chapters 2 and 3 focused largely on the direct costs of financial fragility, namely increased business failures, household bankruptcies, and mortgage foreclosures. It was noted (Ch. 2, Sect. 3) that the key assumption required for such defaults to be of economic relevance is that there should be positive costs of bankruptcy, i.e. that default does not merely involve a smooth transfer of assets from debtor to creditor. Such costs might include not merely legal costs but also difficulties of firms in keeping personnel, obtaining inventory, costs of portfolio reallocation, costs of disposing of collateral, etc. But it was also noted that financial fragility may have broader economic effects. In the extreme, fragility may lead to systemic risk in the financial system; this relationship, as well as other causes and consequences of systemic risk, is explored in Chs. 5–8. Here we assess some of the wider implications of overindebtedness and default for economic performance, short of the generation of financial instability. In general, these are spillovers or externality effects that are not taken into account by companies or households when selecting their level of gearing in the light of their assets and income, nor by lenders choosing their interest rates on loans. They thus constitute possible grounds for policy intervention.Less
Chapters 2 and 3 focused largely on the direct costs of financial fragility, namely increased business failures, household bankruptcies, and mortgage foreclosures. It was noted (Ch. 2, Sect. 3) that the key assumption required for such defaults to be of economic relevance is that there should be positive costs of bankruptcy, i.e. that default does not merely involve a smooth transfer of assets from debtor to creditor. Such costs might include not merely legal costs but also difficulties of firms in keeping personnel, obtaining inventory, costs of portfolio reallocation, costs of disposing of collateral, etc. But it was also noted that financial fragility may have broader economic effects. In the extreme, fragility may lead to systemic risk in the financial system; this relationship, as well as other causes and consequences of systemic risk, is explored in Chs. 5–8. Here we assess some of the wider implications of overindebtedness and default for economic performance, short of the generation of financial instability. In general, these are spillovers or externality effects that are not taken into account by companies or households when selecting their level of gearing in the light of their assets and income, nor by lenders choosing their interest rates on loans. They thus constitute possible grounds for policy intervention.
Leo F. Goodstadt
- Published in print:
- 2011
- Published Online:
- September 2011
- ISBN:
- 9789888083251
- eISBN:
- 9789882207349
- Item type:
- chapter
- Publisher:
- Hong Kong University Press
- DOI:
- 10.5790/hongkong/9789888083251.003.0001
- Subject:
- Economics and Finance, South and East Asia
During the 2007 economic crisis, the various defenses against global recession and worldwide financial instability appeared to be very strong. As such, developing and developed economies agreed that ...
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During the 2007 economic crisis, the various defenses against global recession and worldwide financial instability appeared to be very strong. As such, developing and developed economies agreed that during this period, markets were more efficient than governments in fostering stable growth and in providing consumers with better deals in terms of price, choice, and quality. The central bankers of the world all agreed on the most appropriate regulatory measure in which institutional failure risks are lessened, and financial instability is not passed on from country to country. Financial crises usually initiate from seemingly insignificant market misfortune. Although the crisis was experienced throughout the world, it was mainly rooted in the United States, the United Kingdom, and regulations.Less
During the 2007 economic crisis, the various defenses against global recession and worldwide financial instability appeared to be very strong. As such, developing and developed economies agreed that during this period, markets were more efficient than governments in fostering stable growth and in providing consumers with better deals in terms of price, choice, and quality. The central bankers of the world all agreed on the most appropriate regulatory measure in which institutional failure risks are lessened, and financial instability is not passed on from country to country. Financial crises usually initiate from seemingly insignificant market misfortune. Although the crisis was experienced throughout the world, it was mainly rooted in the United States, the United Kingdom, and regulations.
Nancy Birdsall and Robert Z. Lawrence
- Published in print:
- 1999
- Published Online:
- November 2003
- ISBN:
- 9780195130522
- eISBN:
- 9780199867363
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0195130529.003.0008
- Subject:
- Economics and Finance, Public and Welfare
This chapter looks at financial crises as a challenge to the international financial system and investigates the “public bad” nature of the phenomenon. The conclusion: excessive financial volatility ...
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This chapter looks at financial crises as a challenge to the international financial system and investigates the “public bad” nature of the phenomenon. The conclusion: excessive financial volatility is a global public bad. Instability is not purely a technical by‐product of the production of financial services. Rather, it is the outcome of market failures, for reasons not yet fully understood. Having laid out this diagnosis, the chapter looks at how existing institutions and policies deal with international financial instability, both to limit its acuity and to deal with its implications. The main emphasis is on drawing lessons from recent experiences (Europe, Mexico, and East Asia) and recent theoretical advances, especially those that have improved our understanding of crises. The chapter presents five main proposals. (1) Proceed with caution in promoting capital liberalization; (2) avoid the restrictive macroeconomic policies, huge loans, and deep structural policies of recent packages; (3) complement today's ex post conditionality with ex ante conditionality; (4) suspend debt repayment in the event of a major crisis accompanied by a collapse of the exchange rate; and (5) end the monopoly of the International Monetary Fund (IMF) by creating regional IMFs.Less
This chapter looks at financial crises as a challenge to the international financial system and investigates the “public bad” nature of the phenomenon. The conclusion: excessive financial volatility is a global public bad. Instability is not purely a technical by‐product of the production of financial services. Rather, it is the outcome of market failures, for reasons not yet fully understood. Having laid out this diagnosis, the chapter looks at how existing institutions and policies deal with international financial instability, both to limit its acuity and to deal with its implications. The main emphasis is on drawing lessons from recent experiences (Europe, Mexico, and East Asia) and recent theoretical advances, especially those that have improved our understanding of crises. The chapter presents five main proposals. (1) Proceed with caution in promoting capital liberalization; (2) avoid the restrictive macroeconomic policies, huge loans, and deep structural policies of recent packages; (3) complement today's ex post conditionality with ex ante conditionality; (4) suspend debt repayment in the event of a major crisis accompanied by a collapse of the exchange rate; and (5) end the monopoly of the International Monetary Fund (IMF) by creating regional IMFs.
Claudia Costa Storti and Paul De Grauwe
- Published in print:
- 2004
- Published Online:
- August 2004
- ISBN:
- 9780199271405
- eISBN:
- 9780191601200
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0199271402.003.0015
- Subject:
- Economics and Finance, Economic Systems
The question is how the advent of electronic money affects the size of optimal currency areas. In particular, we study whether currencies of small countries will tend to disappear as a result of ...
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The question is how the advent of electronic money affects the size of optimal currency areas. In particular, we study whether currencies of small countries will tend to disappear as a result of electronic money. The three major forces that will be at work during the transition to a cashless society have different implications for the question at hand. These forces are (a) raising the potential for financial instability during the transition, (b) giving rise to new monetary network externalities that affect the costs and benefits of national media of exchange, and (c) leading to the emergence of new stores of value.Less
The question is how the advent of electronic money affects the size of optimal currency areas. In particular, we study whether currencies of small countries will tend to disappear as a result of electronic money. The three major forces that will be at work during the transition to a cashless society have different implications for the question at hand. These forces are (a) raising the potential for financial instability during the transition, (b) giving rise to new monetary network externalities that affect the costs and benefits of national media of exchange, and (c) leading to the emergence of new stores of value.
A. G. Malliaris
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199844333
- eISBN:
- 9780190258504
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199844333.003.0016
- Subject:
- Business and Management, Finance, Accounting, and Banking
This chapter examines whether or not monetary policy should respond to asset price bubbles. More specifically, it asks how central banks respond while an asset bubble is growing and how they respond ...
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This chapter examines whether or not monetary policy should respond to asset price bubbles. More specifically, it asks how central banks respond while an asset bubble is growing and how they respond after the bubble bursts. It begins with a general overview of asset bubbles that supports the existence of the real and financial sectors of an economy before discussing how the bursting of asset price bubbles may cause financial instability that often adversely affects the real sector of an economy. It then describes the normative vs. positive responses of a central bank to asset price bubbles, along with the concept of macroprudential regulation as an approach for leaning against asset bubbles. It argues that the high costs associated with the 2007–2009 financial crisis undermined the so-called Jackson Hole Consensus and that the new central bank policy paradigm appears to have shifted toward “leaning against bubbles”.Less
This chapter examines whether or not monetary policy should respond to asset price bubbles. More specifically, it asks how central banks respond while an asset bubble is growing and how they respond after the bubble bursts. It begins with a general overview of asset bubbles that supports the existence of the real and financial sectors of an economy before discussing how the bursting of asset price bubbles may cause financial instability that often adversely affects the real sector of an economy. It then describes the normative vs. positive responses of a central bank to asset price bubbles, along with the concept of macroprudential regulation as an approach for leaning against asset bubbles. It argues that the high costs associated with the 2007–2009 financial crisis undermined the so-called Jackson Hole Consensus and that the new central bank policy paradigm appears to have shifted toward “leaning against bubbles”.
Barry Eichengreen
- Published in print:
- 1996
- Published Online:
- November 2003
- ISBN:
- 9780195101133
- eISBN:
- 9780199869626
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/0195101138.001.0001
- Subject:
- Economics and Finance, Economic History
The gold standard and the Great Depression might appear to be two very different topics requiring two entirely separate books, and the attempt to combine them here reflects Barry Eichengreen's ...
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The gold standard and the Great Depression might appear to be two very different topics requiring two entirely separate books, and the attempt to combine them here reflects Barry Eichengreen's conviction that the gold standard is the key to understanding the Depression. The gold standard of the 1920s set the stage for the Depression of the 1930s by heightening the fragility of the international financial system, and was the mechanism that transmitted the destabilizing impulse from the USA to the rest of the world and magnified that initial destabilizing shock; it was the principal obstacle to offsetting action, and the binding constraint preventing policymakers from averting the failure of banks and containing the spread of financial panic. For all these reasons, the international gold standard was a central factor in the worldwide Depression; recovery proved possible, for these same reasons, only after abandoning the gold standard. The gold standard also existed in the nineteenth century, of course, without exercising such debilitating effects – the explanation for the contrast lies in the disintegration during and after World War I of the political and economic foundations of the prewar gold standard system. The dual bases for the prewar system were the credibility of the official commitment to gold and international cooperation: the credibility induced financial capital to flow in stabilizing directions, buttressing economic stability; the cooperation signaled that support for the gold standard in times of crisis transcended the resources any one country could bring to bear. Both were eroded by the economic and political consequences of the Great War, and the decline in credibility rendered cooperation all the more vital – when it was not forthcoming, economic crisis was inevitable. The decline in both credibility and cooperation during and after World War I reflected a complex confluence of domestic and international political changes, and economic and intellectual changes. This book attempts to fit all these elements together into a coherent portrait of economic policy and performance between the wars. The goal is to show how the policies pursued, in conjunction with economic imbalances created by World War I, gave rise to the catastrophe that was the Great Depression. The argument is that the gold standard fundamentally constrained economic policies, and that it was largely responsible for creating the unstable economic environment on which the policies acted.Less
The gold standard and the Great Depression might appear to be two very different topics requiring two entirely separate books, and the attempt to combine them here reflects Barry Eichengreen's conviction that the gold standard is the key to understanding the Depression. The gold standard of the 1920s set the stage for the Depression of the 1930s by heightening the fragility of the international financial system, and was the mechanism that transmitted the destabilizing impulse from the USA to the rest of the world and magnified that initial destabilizing shock; it was the principal obstacle to offsetting action, and the binding constraint preventing policymakers from averting the failure of banks and containing the spread of financial panic. For all these reasons, the international gold standard was a central factor in the worldwide Depression; recovery proved possible, for these same reasons, only after abandoning the gold standard. The gold standard also existed in the nineteenth century, of course, without exercising such debilitating effects – the explanation for the contrast lies in the disintegration during and after World War I of the political and economic foundations of the prewar gold standard system. The dual bases for the prewar system were the credibility of the official commitment to gold and international cooperation: the credibility induced financial capital to flow in stabilizing directions, buttressing economic stability; the cooperation signaled that support for the gold standard in times of crisis transcended the resources any one country could bring to bear. Both were eroded by the economic and political consequences of the Great War, and the decline in credibility rendered cooperation all the more vital – when it was not forthcoming, economic crisis was inevitable. The decline in both credibility and cooperation during and after World War I reflected a complex confluence of domestic and international political changes, and economic and intellectual changes. This book attempts to fit all these elements together into a coherent portrait of economic policy and performance between the wars. The goal is to show how the policies pursued, in conjunction with economic imbalances created by World War I, gave rise to the catastrophe that was the Great Depression. The argument is that the gold standard fundamentally constrained economic policies, and that it was largely responsible for creating the unstable economic environment on which the policies acted.
Morgan Ricks
- Published in print:
- 2016
- Published Online:
- September 2016
- ISBN:
- 9780226330327
- eISBN:
- 9780226330464
- Item type:
- book
- Publisher:
- University of Chicago Press
- DOI:
- 10.7208/chicago/9780226330464.001.0001
- Subject:
- Law, Company and Commercial Law
This book brings a missing and critical dimension to the ongoing debates over financial stability policy. Its core argument is that the problem of financial instability is mostly a problem of ...
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This book brings a missing and critical dimension to the ongoing debates over financial stability policy. Its core argument is that the problem of financial instability is mostly a problem of monetary system design. This argument departs sharply from today’s prevailing view, in which financial instability is generally seen to be an inherent feature of financial capitalism. The book offers a concrete and workable blueprint for a modernized system of money and banking. The proposal is not radical; on the contrary, it is fairly conservative. It could be accomplished through a series of incremental changes to the current system. The book argues that recent financial regulatory reforms—in the United States and, by extension, abroad—have been mostly on the wrong track. Those reforms are an unreliable safeguard against future “shadow banking” panics and other types of financial crises. The book suggests that a revamp of the monetary framework could pave the way for a dramatic reduction in the scope and complexity of modern financial stability regulation.Less
This book brings a missing and critical dimension to the ongoing debates over financial stability policy. Its core argument is that the problem of financial instability is mostly a problem of monetary system design. This argument departs sharply from today’s prevailing view, in which financial instability is generally seen to be an inherent feature of financial capitalism. The book offers a concrete and workable blueprint for a modernized system of money and banking. The proposal is not radical; on the contrary, it is fairly conservative. It could be accomplished through a series of incremental changes to the current system. The book argues that recent financial regulatory reforms—in the United States and, by extension, abroad—have been mostly on the wrong track. Those reforms are an unreliable safeguard against future “shadow banking” panics and other types of financial crises. The book suggests that a revamp of the monetary framework could pave the way for a dramatic reduction in the scope and complexity of modern financial stability regulation.
Claudio Borio
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199844333
- eISBN:
- 9780190258504
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199844333.003.0008
- Subject:
- Business and Management, Finance, Accounting, and Banking
This chapter focuses on the financial instability that results from the bursting of asset price bubbles. It first defines the micro- and macroprudential perspectives before suggesting that the ...
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This chapter focuses on the financial instability that results from the bursting of asset price bubbles. It first defines the micro- and macroprudential perspectives before suggesting that the safeguards against financial instability can be improved by moving beyond microprudential regulation and taking into account the cross-firm interconnections and externalities that arise when financial institutions encounter problems. It also stresses the need to strengthen macroprudential regulation for financial supervision.Less
This chapter focuses on the financial instability that results from the bursting of asset price bubbles. It first defines the micro- and macroprudential perspectives before suggesting that the safeguards against financial instability can be improved by moving beyond microprudential regulation and taking into account the cross-firm interconnections and externalities that arise when financial institutions encounter problems. It also stresses the need to strengthen macroprudential regulation for financial supervision.
William K. Tabb
- Published in print:
- 2012
- Published Online:
- November 2015
- ISBN:
- 9780231158428
- eISBN:
- 9780231528030
- Item type:
- chapter
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231158428.003.0003
- Subject:
- Political Science, Political Theory
This chapter explains the nature of endogenous financial crises by drawing on an alternative approach offered by Hyman Minsky, with particular emphasis on his understanding of the incentives of ...
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This chapter explains the nature of endogenous financial crises by drawing on an alternative approach offered by Hyman Minsky, with particular emphasis on his understanding of the incentives of speculators and of financial cycles in relation to Frank Knight and John Maynard Keynes's stress on uncertainty. It discusses the main assumptions of Minsky's financial instability thesis, including the view that fragility grows over the extended period of prosperity as risk is rewarded, leading to the taking of greater risk. It also considers the “Minsky Moment,” when an overleveraged system encounters financial difficulties, along with the high cost of free financial markets. It suggests that debt-driven fiscal policy was not effective in rectifying the distortion to the economy caused by finance when the long-running accumulation by financialization faltered.Less
This chapter explains the nature of endogenous financial crises by drawing on an alternative approach offered by Hyman Minsky, with particular emphasis on his understanding of the incentives of speculators and of financial cycles in relation to Frank Knight and John Maynard Keynes's stress on uncertainty. It discusses the main assumptions of Minsky's financial instability thesis, including the view that fragility grows over the extended period of prosperity as risk is rewarded, leading to the taking of greater risk. It also considers the “Minsky Moment,” when an overleveraged system encounters financial difficulties, along with the high cost of free financial markets. It suggests that debt-driven fiscal policy was not effective in rectifying the distortion to the economy caused by finance when the long-running accumulation by financialization faltered.
A.G. Malliaris, Leslie Shaw, and Hersh Shefrin
- Published in print:
- 2016
- Published Online:
- January 2017
- ISBN:
- 9780199386222
- eISBN:
- 9780199386253
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199386222.003.0001
- Subject:
- Economics and Finance, Financial Economics
It is the goal of this chapter to articulate the purpose of this book and describe its contribution to the current literature on financial crises. The chapter argues that the complexity of the global ...
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It is the goal of this chapter to articulate the purpose of this book and describe its contribution to the current literature on financial crises. The chapter argues that the complexity of the global financial crisis challenges researchers to offer more comprehensive explanations by extending the scope and range of their traditional investigations. The volume views the financial crisis simultaneously through three different lenses—economic, psychological, and social values. In this respect, what sets the volume apart is its discussion of what has gotten overlooked in the debates about the crisis, and how narrow framing, as opposed to a multidisciplinary methodology, has impacted social discourse about financial instability.Less
It is the goal of this chapter to articulate the purpose of this book and describe its contribution to the current literature on financial crises. The chapter argues that the complexity of the global financial crisis challenges researchers to offer more comprehensive explanations by extending the scope and range of their traditional investigations. The volume views the financial crisis simultaneously through three different lenses—economic, psychological, and social values. In this respect, what sets the volume apart is its discussion of what has gotten overlooked in the debates about the crisis, and how narrow framing, as opposed to a multidisciplinary methodology, has impacted social discourse about financial instability.
Frank Browne and Robert Kelly
- Published in print:
- 2013
- Published Online:
- January 2015
- ISBN:
- 9780262018340
- eISBN:
- 9780262305921
- Item type:
- chapter
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262018340.003.0013
- Subject:
- Economics and Finance, Financial Economics
The optimal level of the capital stock occurs when the real interest rate equals the steady-state growth rate of the economy. Any factor that drives a wedge in this equality can cause prolonged ...
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The optimal level of the capital stock occurs when the real interest rate equals the steady-state growth rate of the economy. Any factor that drives a wedge in this equality can cause prolonged economic dislocation and a misallocation of resources. The more prolonged the dislocation the greater the threat to financial stability. Economic dislocation drove misalignments in asset prices, but had particular effects on property markets in some of the peripheral countries that adopted the euro: Spain, Portugal, Ireland and Greece. The factor driving the wedge in these countries stemmed, firstly, from the dynamics that arose from the fact that these countries were coming from backgrounds of lower standards of living and price levels than those in the core of monetary union and, secondly, from the fact that the ECB's monetary policy bestowed low nominal interest rates on these peripheral countries. Hence real interest rates were very low relative to these countries’ high growth rates. The chapter's measure of economic dislocation can account for the financial-instability-induced output loss. There is a significant relationship between this measure and subsequent output loss both in the euro area and in a wider sample of 57 countries.Less
The optimal level of the capital stock occurs when the real interest rate equals the steady-state growth rate of the economy. Any factor that drives a wedge in this equality can cause prolonged economic dislocation and a misallocation of resources. The more prolonged the dislocation the greater the threat to financial stability. Economic dislocation drove misalignments in asset prices, but had particular effects on property markets in some of the peripheral countries that adopted the euro: Spain, Portugal, Ireland and Greece. The factor driving the wedge in these countries stemmed, firstly, from the dynamics that arose from the fact that these countries were coming from backgrounds of lower standards of living and price levels than those in the core of monetary union and, secondly, from the fact that the ECB's monetary policy bestowed low nominal interest rates on these peripheral countries. Hence real interest rates were very low relative to these countries’ high growth rates. The chapter's measure of economic dislocation can account for the financial-instability-induced output loss. There is a significant relationship between this measure and subsequent output loss both in the euro area and in a wider sample of 57 countries.
Eric Barthalon
- Published in print:
- 2014
- Published Online:
- November 2015
- ISBN:
- 9780231166287
- eISBN:
- 9780231538305
- Item type:
- book
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231166287.001.0001
- Subject:
- Economics and Finance, Behavioural Economics
This book applies the neglected theory of psychological time and memory decay of Nobel Prize–winning economist Maurice Allais (1911–2010) to model investors' psychology in the present context of ...
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This book applies the neglected theory of psychological time and memory decay of Nobel Prize–winning economist Maurice Allais (1911–2010) to model investors' psychology in the present context of recurrent financial crises. Shaped by the behavior of the demand for money during episodes of hyperinflation, Allais's theory suggests economic agents perceive the flow of clocks' time and forget the past at a context-dependent pace: rapidly in the presence of persistent and accelerating inflation and slowly in the event of the opposite situation. The book recasts Allais's work as a general theory of “expectations” under uncertainty, narrowing the gap between economic theory and investors' behavior. The text extends Allais's theory to the field of financial instability, demonstrating its relevance to nominal interest rates in a variety of empirical scenarios and the positive nonlinear feedback that exists between asset price inflation and the demand for risky assets. Reviewing the works of the leading protagonists in the expectations controversy, this volume exposes the limitations of adaptive and rational expectations models and, by means of the perceived risk of loss, calls attention to the speculative bubbles that lacked the positive displacement discussed in Charles P. Kindleberger's model of financial crises. It ultimately extrapolates Allaisian theory into a pragmatic approach to investor behavior and the natural instability of financial markets. It concludes with the policy implications for governments and regulators.Less
This book applies the neglected theory of psychological time and memory decay of Nobel Prize–winning economist Maurice Allais (1911–2010) to model investors' psychology in the present context of recurrent financial crises. Shaped by the behavior of the demand for money during episodes of hyperinflation, Allais's theory suggests economic agents perceive the flow of clocks' time and forget the past at a context-dependent pace: rapidly in the presence of persistent and accelerating inflation and slowly in the event of the opposite situation. The book recasts Allais's work as a general theory of “expectations” under uncertainty, narrowing the gap between economic theory and investors' behavior. The text extends Allais's theory to the field of financial instability, demonstrating its relevance to nominal interest rates in a variety of empirical scenarios and the positive nonlinear feedback that exists between asset price inflation and the demand for risky assets. Reviewing the works of the leading protagonists in the expectations controversy, this volume exposes the limitations of adaptive and rational expectations models and, by means of the perceived risk of loss, calls attention to the speculative bubbles that lacked the positive displacement discussed in Charles P. Kindleberger's model of financial crises. It ultimately extrapolates Allaisian theory into a pragmatic approach to investor behavior and the natural instability of financial markets. It concludes with the policy implications for governments and regulators.
