boom and bust cycles external imbalances and the real exchange rate when the current account balance and net capital outflows do not exactly offset each other international payment flows arise payment flows into a country push the real exchange rate up payment outflows push it down this article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom and bust cycles it shows that during such episodes capital inflows first exceed the deficit on current account strengthening the currency later on when the return on domestic capital reverts to its normal level the current account recovers yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article s theoretical predictions

private sector risk and financial crises in emerging markets investment necessary for growth is risky and often requires external financing we present a model in which capital market imperfections separate countries into a safe credit club of industrial countries with low interest rates and steady credit access and a risky club of emerging markets with high interest rates and volatile access in an emerging market a large negative productivity shock interacts with credit market imperfections to trigger a severe contraction in external lending domestic agents react with widespread default we calibrate to south korean parameters and argue that the 1998 financial crisis could have been the downside of risky investment financed in imperfect capital markets

international credit supply shocks abstract house prices and exchange rates can potentially amplify the expansionary effect of capital inflows we first set up a model of collateralized borrowing in domestic and foreign currency with international financial intermediation in which a change in leverage of global intermediaries leads to an international credit supply increase in this environment we illustrate how house price increases and exchange rates appreciations contribute to fueling the boom by inflating the value of collateral we then document empirically in a panel var model for 50 advanced and emerging countries estimated with quarterly data from 1985 to 2012 that an increase in the leverage of us broker dealers also leads to an increase in cross border credit flows a house price and consumption boom a real exchange rate appreciation and a current account deterioration consistent with the transmission in the model finally we study the sensitivity of the consumption and asset price response to such a shock and show that country differences are associated with the level of the maximum loan to value ratio and the share of foreign currency denominated credit

lending booms latin america and the world recent theories of crisis put lending booms at the root of financial collapses yet lending booms may be a natural consequence of economic development and fluctuations so are lending booms dangerous in this paper we investigate empirically this question using a broad sample of lending boom episodes over 40 years with a special eye for latin america our results indicate that 1 lending booms are often associated with i a domestic investment boom ii an increase in domestic interest rates iii a worsening of the current account iv a declines in reserves v a real appreciation vi a decline in output growth 2 typical lending booms do not increase substantially the vulnerability of the banking sector or the balance of payments comparing latin america and the rest of the world we find that latin america lending booms make the economy considerably more volatile and vulnerable to financial and balance of payment crisis

the global credit boom challenges for macroeconomics and policy the recent financial crisis has put the spotlight on the rapid rise in credit which preceded it in this paper we provide an empirical and theoretical analysis of the credit boom and the macroeconomic context in which it developed we find that the boom was unusually long and associated with neither particularly strong growth nor rising inflation in the economies in which it took place we show that this type of credit and financial cycle is hard to reconcile with existing economic theory and argue that while the global savings glut may account for the cycle s initial phase other factors such as the conduct of monetary policy and perceptions of declining macroeconomic risk were more important from the mid 2000s onwards we conclude by identifying some of the challenges now facing macroeconomics and policy

the political economy of the ecuadorian financial crisis this paper takes the unusual step of exploring economic hypotheses through interviews with key economic agents it focuses on the causes of ecuador s 1999 banking collapse within an eclectic framework with minskian elements broad support is found for endogenous explanations of financial crises and little backing for explanations such as accidents or policy mistakes interviewees argued that after the stabilisation programme of 1992 agents became euphoric and accumulated debt to finance imprudent levels of expansion that incentives for moral hazard led to financial corruption and excessive risk taking and that weak regulation after

the international transmission of credit bubbles theory and policy we live in a new world economy characterized by nancial globalization and historically low interest rates this environment is conducive to countries experiencing credit bubbles that have large macroeconomic eects at home and are quickly propagated abroad in previous work we built on the theory of rational bubbles to develop a framework to think about the origins and domestic eects of these credit bubbles this paper extends that framework to include many countries and general preferences and uses it to study how nancial integration aects the properties of credit bubbles how the latter are transmitted across countries and the role of international policy coordination

do surges in international capital inflows influence the likelihood of banking crises this article asks whether capital inflows bonanzas increase the probability of banking crises and whether this occurs through a lending boom mechanism results indicate that bonanzas more than triple the odds of a crisis raising its probability to 14 from an unconditional probability of 4 this effect exists in the absence of a lending boom and is found in both net and gross inflows bonanzas this effect is driven by portfolio equity and debt flows while the effect of debt is channelled through excessive lending the effect of portfolio equity flows is present even in the absence of a lending boom

equilibrium credit the reference point for macroprudential supervisors equilibrium credit is an important concept because it helps identify excessive credit provision this paper proposes a two stage approach to determine equilibrium credit it uses two stages to study changes in the demand for credit due to varying levels of economic financial and institutional development of a country using a panel of high and middle income countries over the period 1980 2010 this paper provides empirical evidence that the credit to gdp ratio is inappropriate to measure equilibrium credit the reason for this is that such an approach ignores heterogeneity in the parameters that determine equilibrium credit across countries due to different stages of economic development the main drivers of this heterogeneity are financial depth access to financial services use of capital markets efficiency and funding of domestic banks central bank independence the degree of supervisory integration and experience of a financial crisis countries in europe and central asia show a slower adjustment of credit to its long run equilibrium compared with other regions of the world

financial development financial fragility and growth the authors study the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity on the one hand the empirical growth literature finds a positive effect of financial depth as measured by for instance private domestic credit and liquid liabilities for example levine loayza and beck 2000 on the other hand the banking and currency crisis literature finds that monetary aggregates such as domestic credit are among the best predictors of crises and their related economic downturns for example kaminski and reinhart 1999 the authors account for these contrasting effects based on the distinction between the short and long run impacts of financial intermediation working with a panel of cross country and time series observations they estimate an encompassing model of short and long run effects using the pooled mean group estimator developed by pesaran shin and smith 1999 their conclusion from this analysis is that a positive long run relationship between financial intermediation and output growth coexists with a mostly negative short run relationship the authors further develop an explanation for these contrasting effects by relating them to recent theoretical models by linking the estimated short run effects to measures of financial fragility namely banking crises and financial volatility and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions

innovation orientation environment and performance a comparison of u s and european markets much attention has been paid to the importance of innovation in ensuring the survival and growth of companies for u s companies a key issue is to what extent findings for the u s market can be extrapolated to non u s markets to provide a basis for designing innovation strategy similar innovation orientation types were identified in both markets using a sample of consumer businesses from the pims database a number of similarities and differences in associated environments and performance levels were also identified a major finding was that a high degree of product innovativeness leads to generally poor financial and market share performance in both markets but high rates of market share growth another major finding was that having pioneered in a market leads to effective performance results for the associated environments were more mixed in the sense that there was not a perfect correlation in the environments associated with the types in both markets

when micro prudence increases macro risk the destabilizing effects of financial innovation leverage and diversification by exploiting basic common practice accounting and risk management rules we propose a simple analytical dynamical model to investigate the effects of microprudential changes on macroprudential outcomes specifically we study the consequence of the introduction of a financial innovation that allows reducing the cost of portfolio diversification in a financial system populated by financial institutions having capital requirements in the form of value at risk var constraint and following standard mark to market and risk management rules we provide a full analytical quantification of the multivariate feedback effects between investment prices and bank behavior induced by portfolio rebalancing in presence of asset illiquidity and show how changes in the constraints of the bank portfolio optimization endogenously drive the dynamics of the balance sheet aggregate of financial institutions and thereby the availability of bank liquidity to the economic system and systemic risk the model shows that when fin

financial crises and balance of payments crises a simple model of the southern cone experience abstract this paper starts from a simple model of the domestic banking sector and develops the potentially destabilizing macroeconomic consequences of its role in intermediating foreign capital inflows both financial and balance of payments crises may result reminiscent of the southern cone experience

capital flows and destabilizing policy in latin america motivated by the excessive macroeconomic volatility experienced in latin america we examine the possible contribution of monetary and fiscal policies to this outcome in contrast with previous literature we consider the possible simultaneity between policy and gdp growth by using gmm var econometric techniques additionally we explore the direct impact international capital inflows have on these policies our evidence suggests that for the group of countries we consider most practice destabilizing fiscal and monetary policy and capital inflow consistently influences policy in a pro cyclical direction

inequality credit and financial crises in the three decades leading up to the financial crisis of 2008 09 income inequality rose across much of the developed world this has led to a vigorous debate as to whether widening inequality was somehow to blame for the crisis by driving private sector credit booms despite growing interest empirical evidence on an inequality fragility relationship is limited based on a panel analysis of 18 oecd organisation for economic co operation and development countries for the years 1970 2007 this study provides evidence of a positive relationship between income concentration and private sector indebtedness once other traditional drivers are controlled for if confirmed the implications of this result are as follows i the view that the distribution of income is irrelevant to macroeconomic stability as implicit in mainstream approaches needs further investigation and ii in order to make the financial system more robust policy makers should cast the net wider than monetary policy and regulatory reforms and consider the effects of changes to distributive patterns

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

do real exchange rate appreciations matter for growth the impact of exchange rate changes on growth a long standing key issue in international macroeconomics has received renewed attention in recent years owing to weaker growth rates and the debate on currency wars the connection between real exchange rates and growth remains however an unsettled question in the academic literature we fill this gap by providing an empirical assessment based on a broad sample of emerging and advanced economies we assess the impact of appreciations productivity booms and capital inflows surges using a propensity score matching approach to address causality issues appreciations associated with higher productivity have a larger impact on growth than those associated with capital inflows furthermore appreciations per se tend to have a negative impact on growth we provide a simple theoretical model that delivers a contrasted growth appreciation pattern depending on the underlying shock the model also implies adverse effects of shocks to international capital flows so concerns about an appreciation are not inconsistent with concerns about a depreciation while the presence of an externality through firms destruction leads to inefficient allocations addressing the inefficiency does not dampen exchange rate movements

extremal analysis of currency crises in taiwan we employ extreme value theory to identify currency crises in taiwan the new approach is able to identify severe currency crises and at the same time avoid the crisis misclassification problem of markov switching models signal accounting indicates that currency crises in taiwan are preceded by rapid expansion of domestic credit and other monetary aggregates implying that financial excesses stressed by the third generation crisis model are the main causes of these currency crises

wages and performance based pay evidence from the nlsy abstract the link between performance and pay should be strongest where performance is more accurately observed brown industrial and labor relations review 1990 43 1655 1825 rand journal of economics 1992 23 366 375 more productive workers self select into jobs with performance based pay consequently workers whose pay is based on performance should earn more than those whose pay is not based on such measures this paper adds to the literature on the subject by providing new empirical evidence for brown s model using the national longitudinal surveys of youth nlsy data

good booms bad booms credit booms usually precede financial crises however some credit booms end in a crisis bad booms and others do not good booms we document that while all booms start with an increase of total factor productivity tfp and labor productivity lp such growth falls much faster subsequently for bad booms we then develop a simple framework to explain this firms finance investment opportunities with short term collateralized debt if agents do not produce information about the collateral quality a credit boom develops accommodatingfirms with lower quality projects and increasing the incentives of lenders to acquire information about the collateral eventually triggering a crisis when the average quality of investment opportunities also grows the credit boom may not end in a crisis because the gradual adoption of low quality projects is not strong enough to induce information about collateral finally we also test the main predictions of the model

ride the wild surf an investigation of the drivers of surges in capital inflows over the past 15 years gross inflows to industrial and developing countries have enjoyed a wild ride after reaching record highs in the run up to the global financial crisis they collapsed dramatically in 2008 09 as signs of global recovery reappeared capital inflows resumed although at different speeds the recovery in flows was faster and sharper in developing countries this paper aims at understanding the domestic and external drivers of these surges in gross inflows using quarterly data for 67 countries from 1975 to 2010 it finds that domestic and external factors have significant explanatory power in driving surges of inflows this finding holds for the sample of industrial countries whereas domestic factors play a significantly larger role in explaining surges to developing countries zooming into the findings shows that a financial booms tend to attract massive capital inflows b surges to either industrial or developing countries are driven by regional contagion and c strong growth and natural resource abundance are keys to attract inflows of foreign capital into developing countries

capital inflow surges in emerging economies how worried should latin america and the caribbean be in the years leading up to the global economic crisis latin america and the caribbean received large capital inflows nonetheless the region survived the albeit short lived dramatic events of 2007 09 reasonably well with no financial crisis in any of the larger economies after the crisis capital inflows rose again in 2010 gross inflows to seven latin american countries argentina brazil chile colombia mexico peru and venezuela amounted to more than 6 percent of gross domestic product gdp and net inflows exceeded 3 percent of gdp more recently following the may 2013 speech of then chairman of the u s federal reserve ben bernanke there has been concern regarding the potential effects of tapering asset purchases by the u s federal reserve system and rising interest rates possibly spelling the end of large capital inflows to the latin american and caribbean region the literature on capital inflows suggests that while these flows represent an opportunity to spur investment and growth they may also increase vulnerability to financial crises macroeconomic instability and ultimately recession a relevant question then is whether the region can declare victory in being able to manage large capital inflows successfully or whether risks remain that justify strong measures our starting point is that the region has enjoyed strong surges in capital inflows we therefore decided to condition the analysis on surges occurring we do not seek to explain the reasons for such a surge one justification for this decision is that capital flows appear to be driven as much if not more by push rather than pull factors more specifically we seek to understand what determines whether such surges end in either a banking crisis or a recession while there is a substantial literature on the determinants of capital inflows their potential impacts have received much less attention the contribution of this paper is to analyze when inflow surges may end in severe economic problems including financial or macroeconomic instability rather than to identify the determinants of those surges we must first tackle the question of how to define a capital inflow surge we are helped in this regard by a small but growing literature however the current definitions of inflow surges in the literature may be injudicious we propose a new definition which considers the total size of the inflow episode across countries we also employ a more traditional definition based on yearby year inflows relative to a country specific threshold we contrast relevant statistics on the identified episodes using these two definitions and compare our episodes with others found in the literature we also consider whether the analysis should be conducted using gross or net inflows we take the view that employing net flows may discard useful information and that gross flows are relevant where financial instability is a potential concern even if net flows are zero a domestic financial system may intermediate large gross inflows when domestic residents purchase assets abroad we choose to focus on gross inflows but we include gross outflows as a potential explanatory variable so as not to lose information 1the empirical analysis in this paper develops a set of parsimonious models that discriminate reasonably well between the different economic outcomes we then analyze the case of a typical country from the region with a recent capital inflow surge providing a set of simulations to illustrate the economic magnitude of our results we simulate the changes in the estimated probabilities of negative outcomes given changes in certain critical variables we suggest that depending on the country inflow characteristics different policy measures may then be justified however a caveat is that emerging economies in general and latin america and the caribbean in particular have been experimenting with new policy measures and we are not able to evaluate their potential effectiveness in this paper

financial development and the instability of open economies this paper introduces a framework for analyzing the role of financial factors as a source of instability in small open economies our basic model is a dynamic open economy model with a tradeable good produced with capital and a country specific factor we also assume that firms face credit constraints with the constraint being tighter at a lower level of financial development a basic implication of this model is that economies at an intermediate level of financial development are more unstable than either very developed or very underdeveloped economies this is true both in the sense that temporary shocks have large and persistent effects and also in the sense that these economies can exhibit cycles thus countries that are going through a phase of financial development may become more unstable in the short run similarly full capital account liberalization may destabilize the economy in economies at an intermediate level of financial development phases of growth with capital inflows are followed by collapse with capital outflows on the other hand foreign direct investment does not destabilize

currency crises are they all the same abstract the plethora of currency crises around the world has fueled many theories on the causes of speculative attacks the first generation models focus on fiscal problems while the second generation models emphasize countercyclical policies and self fulfilling crises in the 1990s models pinpoint to financial excesses with the crisis of argentina in 2001 models of sovereign default have become popular again while the theoretical literature has emphasized variety the empirical literature has supported the one size fits all models this paper contributes to the empirical literature by assessing whether the crises of the last 30 years are of different varieties

are windfalls a curse abstract a puzzling feature of temporary terms of trade booms is that some countries have responded to such windfalls by running current account deficits furthermore those countries that ran current account deficits failed to attain greater post boom growth rates indicating the deficits were consumed or invested in low quality projects the point we make is that the structure of the fiscal process is critical in determining outcomes if fiscal control is unitary then the consumption smoothing effect is operative and representative agent models of the current account have predictive power however if control is divided among several fiscal claimants a voracity effect appears which counteracts the consumption smoothing effect leading to a deterioration of the current account in response to a positive temporary shock we model the interaction among fiscal claimants as a dynamic game and show that in equilibrium aggregate appropriation increases more than the windfall itself this results in a deterioration of the current account we also show that all the windfall is dissipated with the country experiencing no increase in welfare 1998 elsevier science b v

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the effect of bank bail outs in the eu abstract the financial crisis renewed the debate on the bail out of financial institutions questioning the effectiveness of such an intervention in restoring normal economic conditions this paper analyzes the effect on the real economy of state financial support to distressed banks using a panel approach that covers all countries in the eu throughout the financial crisis results show that state financial support was able to enhance economic conditions by restoring trust in financial markets state support boosted the ongoing substitution between securities and bank lending as the main financing channel of non financial firms

political booms financial crises political booms measured by the rise in governments popularity predict financial crises above and beyond better known early warning indicators such as credit booms this predictive power howev

the collapse of the mexican peso what have we learned the collapse of the mexican peso what have we learned in the first quarter of 1995 mexico found itself in the grip of an intense financial panic foreign investors fled the country despite very high interest rates an undervalued currency and financial indicators that pointed to long term solvency the fundamental conditions of the mexican economy cannot account for the extent of the crisis the crisis was not the result of irresponsible fiscal behaviour the crisis was due to unexpected shocks that occurred in 1994 the inadequate policy response to those shocks the increased vulnerability to panic and finally panic itself in the aftermath of the march assassination the exchange rate experienced a nominal devaluation of around 10 and interest rates increased by 7 percentage points however capital outflows continued the policy response was to maintain the exchange rate rule and to prevent further increases in interest rates interest rates were held down by expanding domestic credit and by converting short term peso denominated government liabilities cetes falling due into dollar denominated bonds tesobonos a fall in international reserves and an increase in short term dollar denominated debt resulted the government simply ended up illiquid and therefore financially vulnerable illiquidity exposed mexico to a self fulfilling panic jeffrey sachs aaron tornell and andres velasco

exchange market mayhem the antecedents and aftermath of speculative attacks exchange market mayhem the antecedents and aftermath of speculative attacks this paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty oecd countries we consider the antecedents and aftermath of devaluations and revaluations flotations fixings and speculative attacks which may not be successful we find that realignments of fixed exchange rates are alike devaluations are preceded by political instability budget and current account deficits and fast growth of money and prices revaluations are mirror images of devaluations speculative attacks resemble devaluations but money growth and inflation are more endemic and there is no last minute attempt to tighten monetary policy in contrast few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables transitions between exchange rate regimes are largely idiosyncratic and are neither consistently provoked ex ante by systematic imbalances nor typically justified ex post by subsequent changes in policy we conclude that there are no clear early warning signals of many speculative attacks and no easy solutions for policy makers barry eichengreen andrew k rose and charles wyplosz

credit booms monetary integration and the new neoclassical synthesis abstract credit to the private sector has risen rapidly in many new central and eastern european eu member states nms in recent years the lending boom has recently been particularly strong in the segment of loans to households primarily mortgage based housing loans and in those countries that operate currency boards or other forms of hard pegs the main aim of this paper is to propose a conceptual framework to analyze the observed developments with a view to exploring some policy implications at a stage in which these countries are preparing for their prospective integration with the euro area to achieve this we first use a stylized new neoclassical synthesis nns framework which has recently been advanced by goodfriend goodfriend m 2002 monetary policy in the new neoclassical synthesis a primer federal reserve bank of richmond july and goodfriend and king goodfriend m king r 2001 the case for price stability nber working paper 8423 we then discuss the implications of the nns model for credit dynamics and ensuing monetary policy challenges specifically we emphasize consumption smoothing as an important channel of the observed credit expansion and we show how it is related to and how it affects the monetary policy making in ms in doing so we place our discussion in the context of the monetary integration process in general and the nominal convergence process in particular

what can we learn about commodity and credit cycles evidence from african commodity exporting countries abstract this study analyzes the relationship between commodity prices and credit to the private sector in commodity exporting developing countries particularly three nations in sub saharan africa in this regard we extend the findings of non empirical studies dealing with this issue for the case of african countries and complement the literature on the methodological side by investigating this relationship using wavelet analysis this frequency approach is appropriate as it takes into account investor heterogeneity and the time variant characteristic of the studied relationship further it explains the lead lag relationship between the studied series first we observe that credit and commodities are strongly related over long timescales suggesting that the credit market reacts strongly to long term change in commodity markets and thus tends to be sensitive to persistent commodity shocks second for medium and short timescales the interaction is high and significant only during periods of turmoil in terms of the lead lag relationship our results also show that the commodity market causes fluctuations in the credit market

credit booms and macrofinancial stability this paper explores several questions about credit booms and busts when do credit booms occur when do they end up in busts and when do they not what are the implications for different policies if curbing credit growth and or mitigating the associated risks is an objective we find that credit booms are often associated with financial reform and economic growth they also tend to be more frequent in fixed exchange rate regimes only one in three credit boom episodes are followed by a financial crisis these booms tend to be larger and last longer macroprudential tools have at times proven effective in containing booms and more often in limiting the consequences of busts due to the buffers they helped to build