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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.
... This paper contributes to the literature encompassing the economic link between banking and sovereign debt crises, and early-warning-systems. Across countries and time, the theoretical and empirical evidence supports the view that banking crisis are economically linked to sovereign debt crisis and can increase the likelihood of sovereign default (Diaz-Alejandro, 1985;Velasco, 1987;Arellano, 2008;Reinhart and Rogoff, 2010Yan et al., 2015). More specifically, one strand of literature focuses on connectedness of global banking networks, contagion and systemic risk during banking crisis (Minoiu, et al. 2015;Gai, Haldane and Kapadia, 2011;Cont, Moussa and Santos, 2013;Allen, Babus and Carletti, 2012). ...
... In general, prior to a banking crisis private debtsexternal debt, broader private capital inflows, domestic bank debt -accumulate and also display a repeated cycle of boom and bust with the run-up in debts accelerating as the crisis point is reached. Subsequent bank collapses and large-scale government bailouts increase sovereign indebtedness and their propensity to default increases as subsequent decreases (post-bailout recession) in economic activity reduces government tax revenue and their ability to service debts which in turn increases the propensity for Sovereign default (Diaz-Alejandro, 1985;Velasco, 1987;Arellano, 2008). Arellano and Kockerlakota (2014) develop a model which incorporates a self-fulfilling belief that if all debtors know that all other debtors are going to default, then they all know that they will be subject to a small sanction. ...
... At the heart of this paper is the concept of indebtedness. Our findings of connectedness evolving over time from a banking crisis to a sovereign debt crisis are consistent with this literature (Diaz-Alejandro, 1985;Velasco, 1987;Arellano, 2008;Reinhart and Rogoff (2010. The spectre of Covid-19 in 2020 has again highlighted the important issue of sovereign indebtedness. ...
This paper investigates network connectedness of European sovereign bond markets from 2005 to 2011. To overcome weaknesses in alternative methodologies to estimate network connectedness we adopt the unified methodology recommended by Diebold and Yilmaz (2014). Our analysis shows that European sovereign bond market connectedness deteriorated with the onset of the global financial crisis which was exacerbated by the European sovereign debt crisis, with some peripheral countries deteriorating into isolation by 2011. Dynamic connectedness modelling shows that the Lanne-Nyberg (2016) total connectedness measure was much more volatile than the Pesaran-Shin (1998) approach and suggests that the Lanne-Nyberg variance decomposition was a leading indicator of instability from early 2008 to July 2008, and should be used as these decomposition methods lead to different systemic risk and vulnerability rankings.
... Whatever the causes of currency crises, neither the old literature nor the new models of self-fulfilling crises have paid much attention to the interaction between banking and currency problems, despite the fact that many of the countries that have had currency crises have also had full-fledged domestic banking crises around the same time. Notable exceptions are: Carlos F. Díaz-Alejandro (1985), Andres Velasco (1987), Calvo (1995), Ilan Goldfajn and Rodrigo O. Valdés (1995), and Victoria Miller (1995). As to the empirical evidence on the potential links between what we dub the twin crises, the literature has been entirely silent. ...
... Moreover, Frederic S. Mishkin (1996) argues that, if a devaluation occurs, the position of banks could be weakened further if a large share of their liabilities is denominated in a foreign currency. Models, such as Velasco (1987), point to the opposite causal directionfinancial-sector problems give rise to the currency collapse. Such models stress that when central banks finance the bailout of troubled financial institutions by printing money, we return to the classical story of a currency crash prompted by excessive money creation. ...
... The probability of a currency crisis conditioned on the beginning of bankingsector problems is 46 percent, well above the unconditional estimate of 29 percent. Hence, it Argentina could be argued, as Díaz-Alejandro (1985) and Velasco (1987) did for the Chilean crisis in the early 1980's, that, in an important number of cases, the bailout of the banking system may have contributed to the acceleration in credit creation observed prior to the currency crises (see Herminio Blanco and Peter M. Garber, 1986;Sebastian Edwards, 1989;Eichengreen et al., 1996b;and this paper). Even in the absence of a large-scale bailout, a frail banking system is likely to tie the hands of the central bank in defending the currency-witness Indonesia in August 1997. ...
... This question has received little attention in the literature. Theoretical models by Velasco (1987) and Chang and Velasco (1998) suggest that using large amounts of central bank money to ease conditions in the financial system may pave the way for a currency crisis. Finding an answer is crucial considering that emerging markets have a record of recurrent financial crises that took a large toll on economic growth and stability. ...
... Our results suggest that credit easing has large adverse side effects when implemented during an acute banking crisis-much larger than the linear model suggests. Our results are therefore consistent with the theoretical notions of Velasco (1987) and Chang and Velasco (1998). As a benchmark, we also study credit easing in a panel of advanced economies and find the effects to be much more benign: credit easing has a mild positive effect on inflation and a positive but negligible effect on output growth. ...
... During times of severe banking crises, however, economic agents might expect that the central bank will abandon its primary policy goal and inject large amounts of liquidity into the financial system. This, in turn, might trigger a substantial domestic currency depreciation and inflation, and, in some cases, pave the way for a currency crisis (Velasco 1987). Therefore, a linear model is likely to underestimate the effects (in absolute value) of credit easing during a systemic banking crisis. ...
... This paper contributes to the literature encompassing the economic link between banking and sovereign debt crises, and early-warning-systems. Across countries and time, the theoretical and empirical evidence supports the view that banking crisis are economically linked to sovereign debt crisis and can increase the likelihood of sovereign default (Diaz-Alejandro, 1985;Velasco, 1987;Arellano, 2008;Reinhart and Rogoff, 2010Yan et al., 2015). More specifically, one strand of literature focuses on connectedness of global banking networks, contagion and systemic risk during banking crisis (Minoiu, et al. 2015;Gai, Haldane and Kapadia, 2011;Cont, Moussa and Santos, 2013;Allen, Babus and Carletti, 2012). ...
... In general, prior to a banking crisis private debtsexternal debt, broader private capital inflows, domestic bank debt -accumulate and also display a repeated cycle of boom and bust with the run-up in debts accelerating as the crisis point is reached. Subsequent bank collapses and large-scale government bailouts increase sovereign indebtedness and their propensity to default increases as subsequent decreases (post-bailout recession) in economic activity reduces government tax revenue and their ability to service debts which in turn increases the propensity for Sovereign default (Diaz-Alejandro, 1985;Velasco, 1987;Arellano, 2008). Arellano and Kockerlakota (2014) develop a model which incorporates a self-fulfilling belief that if all debtors know that all other debtors are going to default, then they all know that they will be subject to a small sanction. ...
... At the heart of this paper is the concept of indebtedness. Our findings of connectedness evolving over time from a banking crisis to a sovereign debt crisis are consistent with this literature (Diaz-Alejandro, 1985;Velasco, 1987;Arellano, 2008;Reinhart and Rogoff (2010. The spectre of Covid-19 in 2020 has again highlighted the important issue of sovereign indebtedness. ...
This paper investigates network connectedness of European sovereign bond markets from 2005 to 2011. To overcome weaknesses in alternative methodologies to estimate network connectedness we adopt the unified methodology recommended by Diebold and Yilmaz (2014). Our analysis shows that European sovereign bond market connectedness deteriorated with the onset of the global financial crisis which was exacerbated by the European sovereign debt crisis, with some peripheral countries deteriorating into isolation by 2011. Dynamic connectedness modelling shows that the Lanne-Nyberg (2016) total connectedness measure was much more volatile than the Pesaran-Shin (1998) approach and suggests that the Lanne-Nyberg variance decomposition was a leading indicator of instability from early 2008 to July 2008, and should be used as these decomposition methods lead to different systemic risk and vulnerability rankings.
... In addition, Velasco (1987) examined how financial crisis and balance-of-payments crisis have affected Latin American economies, with particular reference to Chile, during the 1970's. He had explored the connection between the balance of payments and the health of the financial system and how they can affect macroeconomic stability. ...
... If the banks collapse, the government will be liable for its guarantee and this is likely to create a deficit, which will eventually lead to a balance-ofpayments crisis. (Velasco, 1987) Thus, regardless of how the government deficit is generated, i.e. over-spending or bailing out private banks, a budget deficit could create a fundamental cause of crisis via balance-of-payment crisis in the manner of Krugman. ...
p>The importance of South-east Asian economies in the world economy became apparent through their rapid increasing shares in the world trade. The fast growing trade sector in these countries enabled a near double digit economic growth rate in the 1970s and 1980s. When a group of under-developed economies quickly turns themselves into emerging economies and gain a reputation as an 'Asian Miracle', this naturally attracts economists' attention into the field. The key driving force of the growth rate in these countries was seen to be exports and investment, this has been emphasized and accepted in a large number of papers.
However, an equally interesting question concerns the relative growth rates of economies within the region, an issue which the first paper, Comparative Economic Development , of this thesis will investigate. Korea, Thailand and the Philippines were at a similar state of development with comparable level of GNP per capita in 1960, but had achieved very different levels of economic success by 1990. Ironically, among the three countries in consideration, the Philippines was endowed with the most favourable human and capital resources but turned out to be the least successful economy 30 years afterward, and the opposite is true for Korea. Although regression results confirm that their growth rates have been influenced by common factors such as exports and investment, their relative success can partially be explained by differences in other factors captured in the model. To what extent do these other factors play a role in explaining their relative growth rate during 1960-1990? Were they country-specific factors - or can they be duplicated in other countries? The first paper attempts to provide insights to these questions and to identify the key ingredients of economic success.
Regardless of relative economic success found within the region, these South-east Asian countries have recorded the highest average growth rates among developing countries. However, this reputation was shattered when the financial crisis broke out in one of the fast growing economies in the region, Thailand. This crisis was largely unanticipated in terms of its timing and severity and economists are still to agree on its root causes. The second paper tries to identify the cause of the crisis by examining what actually happened during the few years preceding the crisis in the original country where the crisis broke out.</p
... According to Diaz-Alejandro (1985) and Velasco (1987) , central bank bailouts of troubled banks as a result of a banking crisis lead to excessive money creation. This can trigger a currency crisis if the majority of short-term obligations of the banks are in foreign currency. ...
... Theoretical studies emphasizing this relationship areDiaz-Alejandro (1985),Velasco (1987) andCalvo (1998) . Following theoretical studies, we also consider interacting lagged banking crisis dummy with foreign monetary policy and the international financial liberalization indicator. ...
The purpose of this study is to provide empirical evidence on the links between currency and banking crises. Panel data probit and bivariate probit models are estimated to a sample of 21 developed and developing countries having monthly observations between the years 1985 and 2010. The findings indicate that banking crises precede currency crises, and vice versa. Currency crises also indirectly influence future banking crises probability through external shocks, liberalized financial markets, or highly-leveraged banking sectors. The study also finds evidence of contemporaneous correlation between the two crises. The results not only confirm the theoretical links between banking and currency crises, but also underline the importance of higher frequency data in analyzing the relationship between various financial crises.
... However, after the Asian currency turmoil, neither of those approaches has been considered satisfactory, despite the fact that many of the East Asia countries that have had currency crises have also had full-fledged domestic banking crises around the same rime. The interaction between banking and currency problems has already been discussed by Díaz-Alejandro (1985), Velasco (1987), Calvo (1995), Goldfajn and Valdés (1995), Miller (1995) and . ...
... Furthermore, we note that it has been commonly used in the literature. See Pill and Pradhan (1995), Mishkin (1996), Galbis (1993), Velasco (1987), Kaminsky and Reinhart (1998), Kaminsky and Reinhart (1999), Diehl and Schweickert (1998), Krugman (1998a) and Hardy and Pazarbasioglu (1998). ...
Este artigo propõe um teste empírico com indicadores macroeconômicos, relativo aos setores bancário e externo no período pré-crise em 1996, para identificar grupos de países susceptíveis à crise do leste asiático em 1997-98. Neste contexto, nós estimamos escores de crise para uma amostra de 18 países com base em indicadores dos setores bancário e externo. Aplicamos análise de agrupamento aos escores de crise para estratificar os países em dois grupos homogêneos (mais vulneráveis e menos vulneráveis à crise). Os países mais vulneráveis à crise são Tailândia, Indonésia e Coréia.
... Among other studies, Obstfeld (1995) argued that a troubled domestic banking sector might lead to the devaluation of the domestic currency if policymakers preferred inflation over exchange rate stability to reduce pressure on the damaged banking sector. Velasco (1987) and Miller (1999) showed that under a fixed exchange rate, with the occurrence of a banking crisis as a result of the banking run, the central bank that financed the bailout of the troubled banking system by printing money could contribute to currency attack and currency crisis. Mishkin (1996) considered that when more share of bank liability was determined in a foreign currency, banks would be weaker if devaluation occurred. ...
The coincidence of banking and currency crises since the 1990s has attracted the attention of many economists to the causal relationship between them. The current paper aims to determine the potential indicators of banking and currency crises and their causality in the Iranian economy during 1980-2018. For this purpose, we first study the different developments in the Iranian economy over the last four decades. Then, two types of variables, including multi-categorical and dummy variables, are extracted from the exchange market pressure index (EMPI) and money market pressure index (MMPI). The empirical results found that the two crises could occur closely together in the same periods. According to the ordered logit and logit model, the results showed that the impact of the currency crises on banking crises was positive and statistically significant. Still, banking crises did not lead to currency crises when banking crises were peroxide as the dependent variable. In addition, the Granger causality test showed some one-way causality from EMPI to MMPI.
... 19 Second, the sovereign itself can be a source of banking stress. The sovereign-bank doom loop has attracted particular attention following the euro area crisis (CGFS (2011)), but such events were quite common in EMEs in the past, not least because of a large, albeit declining, portion of foreign-currency denominated debt (Velasco (1987), Calvo and Mendoza (1996) and Corsetti et al (1999)). Some diagnostic tools have been developed to measure cyclically adjusted fiscal balances and to capture contingent liabilities in real time (eg, Borio et al (2018) and ). ...
... As financial crises are repeatedly transmitted among countries and regions through different channels, scholars have been prompted to conduct theoretical and empirical studies on financial risk contagion and have developed influential theories and models. eories such as the thirdgeneration moral hazard crisis model [31,32] and the fourth-generation financial crisis model [33] have provided guidance for the study of risk contagion in the financial domain. However, as an important part of the modern financial system, the risk contagion mechanism of guarantee has also gradually received the attention of scholars. ...
Financing guarantee is an important means and key link to solve the financing difficulties of small- and medium-size enterprises (SMEs). However, while financial guarantees alleviate the financing difficulties of SMEs, the complex guarantee relationships also constitute a new channel for credit risk contagion in the financial guarantee network. In this paper, we construct a model of credit risk contagion process of guarantee network based on SEIR and analyse the equilibrium point and stability of the model. Then, we find the threshold value of risk contagion and further simulate the SEIR model dynamically to analyse the influence of each parameter of the model. The results show that the risk of the financing guarantee network begins to be widely contagious only when risk contagion threshold is greater than 1, and the conversion rate of exposed enterprises, removal rate of infected enterprises, nodal enterprises degree, and risk contagion rate have significant effects on the changes of individual density of susceptible, exposed, infected, and recovered enterprises. Combining the above findings, it is of great theoretical and practical significance to propose relevant countermeasures for credit risk control of financial guarantee network.
... Among other studies, Obstfeld (1995) argued that a troubled domestic banking sector might lead to the devaluation of the domestic currency if policymakers preferred inflation over exchange rate stability to reduce pressure on the damaged banking sector. Velasco (1987) and Miller (1999) showed that under a fixed exchange rate, with the occurrence of a banking crisis as a result of the banking run, the central bank that financed the bailout of the troubled banking system by printing money could contribute to currency attack and currency crisis. Mishkin (1996) considered that when more share of bank liability was determined in a foreign currency, banks would be weaker if devaluation occurred. ...
The coincidence of banking and currency crises since the 1990s has attracted the attention of many economists to the causal relationship between them. The current paper aims to determine the potential indicators of banking and currency crises and their causality in the Iranian economy during 1980-2018. For this purpose, we first study the different developments in the Iranian economy over the last four decades. Then, two types of variables, including multi-categorical and dummy variables, are extracted from the exchange market pressure index (EMPI) and money market pressure index (MMPI). The empirical results found that the two crises could occur closely together in the same periods. According to the ordered logit and logit model, the results showed that the impact of the currency crises on banking crises was positive and statistically significant. Still, banking crises did not lead to currency crises when banking crises were peroxide as the dependent variable. In addition, the Granger causality test showed some one-way causality from EMPI to MMPI.
... Gambling for resurrection is well known in the literature on banking and denotes excessive risktaking by troubled banks. The management is aware of the solvency problem and may borrow (usually short-term and at high rates) to pay off depositors (Velasco (1987) stresses moral hazard), offer ever higher deposit rates to attract depositors (Rojas-Suarez 2002), and lend to short-term risky projects in the hope that the "gamble" will pay off. It is difficult to document when these strategies have paid off and a crisis was avoided for individual banks. ...
I discuss the multifaceted economic and financial vulnerabilities that have been created or exacerbated by the COVID-19 pandemic on a foundation of already weak economic fundamentals in many countries. Crises often do not travel alone. Banking, sovereign debt, exchange rate crashes, sudden stops, inflation often intersect to become severe conglomerate crises. Historically, whether of the individual or conglomerate variety, crises influence the shape and speed of economic recovery. As the health crisis morphs into a financial or debt crisis in some countries, I discuss what may lie ahead in terms of the stages in crisis resolution and brief reflection how the resolution process can be expedited.
... Gambling for resurrection is well known in the literature on banking and denotes excessive risktaking by troubled banks. The management is aware of the solvency problem and may borrow (usually short-term and at high rates) to pay off depositors (Velasco (1987) stresses moral hazard), offer ever higher deposit rates to attract depositors (Rojas-Suarez 2002), and lend to short-term risky projects in the hope that the "gamble" will pay off. It is difficult to document when these strategies have paid off and a crisis was avoided for individual banks. ...
... However, the theoretical and empirical literature regarding the linkage between currency vulnerability and banking crisis is very limited. While some scholars - Velasco (1987), Obstfeld (1996), and Calvo (1998) -argued that bank-based indicators are likely to trigger currency vulnerability "if the increased liquidity associated with a government bailout of the banking system is inconsistent with a stable exchange rate" (Shen andChen, 2008), Miller (1996), Chang andVelasco (2001), andNakatani (2016) underlined that currency vulnerability is an important predictor of a banking sector crisis. They supported the argument that vulnerability in exchange rate may trigger bank crisis if deposit money is used to speculate in the foreign exchange market and banks are loaned up. ...
The two-way linkage between non-performing loans (NPL) and the US dollar-Turkish lira exchange rate (USD/TRY) (ER) is explored in Turkey using quarterly data from 1995Q1 to 2017Q4 using wavelet coherence technique. The findings of this study indicate that: (i) significant vulnerability in NPL is detected between 1999 and 2004, while ER significantly fluctuated during the period between 2001 and 2003 and the 2008 global crisis period in the short run; (ii) ER has a strong power to explain NPL at difference frequencies; (iii) NPL and ER were positively correlated in Turkey during the global crisis period.
... DiscussionApplying a tax model that reproduces increases in tax rates and overdue debts leads to periodic financial cessation(Velasco 1987). Unpredictable fiscal balances and weak positive increases in economic growth simply confirm the failure to achieve a sound economic model that brings social prosperity, especially when 10 years of regular tax adaptation has been preceded by increasing taxation. ...
Abstract The failure over time of the tax system in Greece to harmonize with a sound and efficient fiscal mix raises questions about the possibility of a radical restructuring. The last decade of continuous tax reforms has neither particularly restricted the black economy nor provided the government with fresh fiscal resources, and it has outgrown its arrears. A socially acceptable fiscal policy may lead to a new, sound fiscal policy mix. Tax restructuring that strengthens the tax base at the regional, local or European level—compared to its structuring at the one-sided governmental level to date—may be a key factor in the social acceptance of a new tax system. The degree of tax decentralization of the applied tax policy is likely to improve fiscal order and management on the one hand and, on the other hand, enhance tax revenues by enhancing tax compliance.
... The effects of applying a tax model that reproduces increases in tax rates and arrears lead to periodic financial cachexia [60]. Unpredictable fiscal balances and weak positive increases in the sign of economic growth simply confirm the result of the failure to achieve a sound economic model that brings social prosperity, especially when ten after years of regular tax adaptation has been preceded by increasing taxation. ...
The continuing ineffectiveness of the tax reforms in Greek economy raises concerns about the need for a meaningful restructuring of the structure of fiscal administration. Tax restructuring that enhances regional, local or European taxation by weakening government taxation can be a key factor in reforming the tax system. The degree of tax decentralization of the tax policy applied is likely to improve the fiscal order and management and, on the other hand, it can be strengthened tax revenues by enhancing tax compliance. The main purpose of this paper is to emphasize that the decentralization of taxation to a more socially acceptable regional fiscal policy can lead to an acceptable tax reform in the case of the Greek economy. A reform of the revenue management at local, regional, central and European level with a more socio-centric fiscal expenditure mix is more desirable.
... Moreover, Frederic S. Mishkin (1996) argues that, if a devaluation occurs, the position of banks could be weakened further if a large share of their liabilities is denominated in a foreign currency. Models, such as Velasco (1987), point to the opposite causal directionfinancial-sector problems give rise to the currency collapse. Such models stress that when central banks finance the bailout of troubled financial institutions by printing money, we return to the classical story of a currency crash prompted by excessive money creation. ...
In the wake of the ERM and Mexican currency crises, the subject of balance-of-payments crises has come to the forefront of academic and policy discussions. This paper focuses on the potential links between banking and balance-of-payments crises. We examine these episodes for a large number of countries and find that knowing that there are banking problems helps in predicting balance-of-payments crises, but the converse is not true; financial liberalization usually predates banking crises, indeed, it helps predict them. Rather than a causal relationship from banking to balance-of-payments crises, the macroeconomic "stylized facts" that characterize these episodes point to common causes.
... In some cases, a crisis relates only to one of these categories, however, in most cases, it relates to more than one category. For instance, a sovereign debt crisis is often triggered by a banking crisis, forcing the national government to take over debts in the banking sector (Reinhart and Rogoff 2011;Velasco 1987). Similarly, a debt crisis may result in the depreciation of the local currency and spillover into an inflation crisis as a country facing insolvency tend to engage in expansionary monetary policies to reduce the debt burden (Lában and Sturzenegger 1994). ...
This article investigates the effect of different economic and financial crises, such as inflation crisis, stock market crash, debt crisis, and banking crisis on international tourism flows using a panel gravity data set of 200 countries over the period 1995 to 2010. The results show that the inflation crisis has a dampening effect on international tourism flows in both the host and origin countries. The results also show that domestic debt crisis encourages international tourism arrivals in the host countries, whereas its impact on international tourism services in originating countries is negative. Further, the impact of these crises on tourism is region dependent. In particular, banking crisis depresses international tourism flows in host countries situated in regions such as America and Latin America and Caribbean, whereas its impact on originating countries located in regions such as Asia and the Middle East is insignificant.
... The findings show a statistically significant negative impact of domestic public debt on interest rate, productivity and inflation. Tsoulfidis (2011) & Rogoff (2011) used two centuries of data in 70 countries to prove the contingent liability theory (Velasco, 1987). The duo find that public debt increases by 86% in the first three years after any financial crisis, establishing a two-dimensional causal relationship between domestic public debt and banking crisis -by extension, liquidity. ...
This study empirically appraised the association between domestic debt and liquidity in Nigeria, with the use of quarterly data from 2006 to 2015. The work utilized Federal Government of Nigeria Bonds, Nigeria Treasury Bills and Nigeria Treasury Bonds as proxies for domestic debt; and Liquidity proxied by Broad Money Supply (M2). In order to analyze relevant data, descriptive and econometric tools that include mean, Ordinary Least Square, Unit root test, Johansen Cointegration, Granger causality test and diagnostic tests were applied. Empirical outcomes indicate that there exists a significant positive short run relationship between Federal Government of Nigeria Bonds and Liquidity. Also, the Nigeria Treasury Bills and Nigeria Treasury Bonds show a short run negative albeit, insignificant relationship with liquidity respectively. While in the long run, all endogenous variables exhibit a significant relationship with the exogenous variable. The principal implication of this research is that short and medium term debt instruments impede liquidity in Nigeria. Consequently, it is recommended that treasury bills issuance should be confined to monetary policy attainment rather than a deficit financing avenue, treasury bonds should be gradually phased out, other long term financing options should be explored; among others.
... Banking crises most often either precede or coincide with sovereign debt crises. The reasons for this temporal sequence may be the contingent liability story emphasized by Carlos Diaz-Alejandro (1985) and formalized in Velasco (1987), in which the government takes on massive debts from the private banks, thus undermining its own solvency. 20 The currency crashes that are an integral part of the "twin crisis" phenomenon documented by Kaminsky and Reinhart (1999) would also be consistent with this temporal pattern. ...
The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets. 1 It is particularly distressing that so many crosscountry analyses of financial crises rely on debt and default data going back only to 1980, when the underlying cycle can be a half century or more long, not just 30 years. 2 This paper attempts to address this deficiency by employing a comprehensive new long-term historical database for studying debt and banking crises, inflation, and currency crashes. 3 To construct our dataset, we build on the work of many scholars as well as a considerable amount of new material from diverse primary and secondary sources. The data covers 70 countries in Africa, Asia, Europe, Latin America, North America, and Oceania. 4 The range of variables encompasses external and domestic debt, trade, GNP, inflation, exchange rates, interest rates, and commodity prices. 5 Our analysis spans over two centuries, going back to the date of independence or well into the colonial period for some countries.
... Tsoulfidis (2011) also used data from the United Kingdom from 1756 to 1815 to analyze Mill's conjecture on domestic public debt, interest rate, rate of profit and real wage. The study employed correlation analysis to affirm that Mill's postulations are valid.Reinhart & Rogoff (2011)used two centuries of data in 70 countries to prove the contingent liability theory (Velasco, 1987). The duo find that public debt increases by 86% in the first three years after any financial crisis, establishing a two-dimensional causal relationship between domestic public debt and banking crisis – by extension, liquidity. ...
... Krugman (1997) Obstfeld (1984Obstfeld ( ve 1986, Velasco (1987), Agenor, Bhandari ve Flood (1992), Jeane (1997), Sharma (1999), Miller (1999), Bustelo (2000) Corrado ve Holly (2000). ...
Stability in the banking sector of Sierra Leone is crucial because it gives confidence and trust in the banking ecosystem. However, it is vital to assess the health conditions of the sector, by means of a composite Banking Sector Stability Index (BSSI) for Sierra Leone. This BSSI will supplement the suite of early warning indicators of the financial system and offers a platform to keep policymakers informed about the dynamics in the ecosystem of Sierra Leone. This study developed a banking sector stability index (BSSI) for Sierra Leone, using a nest of financial soundness indicators and gauges the health of the banking ecosystem with short term forecasting tendencies conditions in the banking ecosystem. It applied statistical and Conference Board Methodology normalization processes on Sierra Leone’s banking data from 2019Q1 to 2022Q4. The resultant index traced fairly well the episodes of crisis in the system over the study period. It could, therefore, be employed as a complementary regulatory policy tool to gauge potential risks to enable monetary authorities take timely precautionary policy measures to assuage crisis in the banking ecosystem.
Stability in the banking sector of Sierra Leone is crucial because it gives confidence and trust in the banking ecosystem. However, it is vital to assess the
health conditions of the sector, by means of a composite Banking Sector Stability Index (BSSI) for Sierra Leone. This BSSI will supplement the suite of
early warning indicators of the financial system and offers a platform to keep policymakers informed about the dynamics in the ecosystem of Sierra Leone.
This study developed a Banking Sector Stability Index (BSSI) for Sierra Leone, using a nest of financial soundness indicators and gauges the health of the
banking ecosystem with short term forecasting tendencies conditions in the banking ecosystem. It applied statistical and Conference Board Methodology
normalization processes on Sierra Leone’s banking data from 2019Q1 to 2022Q4. The resultant index traced fairly well the episodes of crisis in the system
over the study period. It could, therefore, be employed as a complementary regulatory policy tool to gauge potential risks to enable monetary authorities
take timely precautionary policy measures to assuage crisis in the banking ecosystem.
Parte da constatação de quão rápido e com que força destrutiva as crises bancárias emergem, e de como é difícil antecipá-las e prever seus dramáticos desdobramentos. Observa que a coincidência entre crises cambiais e bancárias associadas à crise financeira asiática, chamou atenção para os fatores causais e comuns que unem os dois fenômenos. Procura identificar os principais fatores explicativos das crises bancárias e cambiais e enfatiza que, enquanto crises cambiais conduzindo a crises bancárias é uma direção mais óbvia de causalidade, crises bancárias também podem conduzir a crises cambiais e, realmente, todo o processo pode ser reforçado e realimentado aumentando a intensidade da crise.
The goal of this research is to explore the causes as well as the influence of financial crises in terms of trade openness, interest rate, inflation, and external debt on Pakistan's economic growth from 1980-2020. Identify crucial crisis causes so that inflation expectations, higher interest rates, and a rise in external debt levels can be managed. Considering the interrelationship between macroeconomic factors and Gross Domestic Product (GDP) the ADF unit root test, Johansen's co-integration test, and Granger-causality test have been set down. The analysis concludes that all included variables like interest rates, inflation rate, trade openness, and foreign debt have considering co-integration between them. In the long run, all the variables except public debt have significantly correlated with GDP.The rate of interest is a key tool that is accessible to the government to interfere with the nation's monetary system. However, upward interest rates in the nation are suppressed stock returns and may consequence in increased debt expenses. Furthermore, that GDP has a relation between all the overall macroeconomic variables used in this analysis exempting external debt.
The goal of this research is to explore the causes as well as the influence of financial crises in terms of trade openness, interest rate, inflation, and external debt on Pakistan's economic growth from 1980-2020. Identify crucial crisis causes so that inflation expectations, higher interest rates, and a rise in external debt levels can be managed. Considering the interrelationship between macroeconomic factors and Gross Domestic Product (GDP) the ADF unit root test, Johansen's co-integration test, and Granger-causality test have been set down. The analysis concludes that all included variables like interest rates, inflation rate, trade openness, and foreign debt have considering co-integration between them. In the long run, all the variables except public debt have significantly correlated with GDP.The rate of interest is a key tool that is accessible to the government to interfere with the nation's monetary system. However, upward interest rates in the nation are suppressed stock returns and may consequence in increased debt expenses. Furthermore, that GDP has a relation between all the overall macroeconomic variables used in this analysis exempting external debt.
This paper explores the origins of German banks’ risk‐taking in the years preceding the 1931 crisis. The 1920s were marked by a large and prolonged increase in capital flows into Germany, chiefly from the United States and the United Kingdom. This coincided, at the individual bank level, with a rise in leverage and a fall in liquidity. We examine possible connections between the two phenomena. Our analysis is based on a combination of historiographical work and statistical modelling based on a newly hand‐collected bimonthly dataset on German reporting banks from 1925 to 1935. Bank by bank we examine the effects of foreign inflows on decisions related to leverage, lending, and liquidity. The Dawes Plan of 1924 and the relative absence of a too‐big‐to‐fail (TBTF) environment allow us to mitigate endogeneity concerns. We suggest that while capital inflows did not seem to impact banks’ liquidity decisions, their impact on leverage was non‐negligeable.
The goal of this research is to explore the causes as well as the influence of financial crises in terms of trade openness, interest rate, inflation, and external debt on Pakistan's economic growth from 1980-2020. Identify crucial crisis causes so that inflation expectations, higher interest rates, and a rise in external debt levels can be managed. Considering the interrelationship between macroeconomic factors and Gross Domestic Product (GDP) the ADF unit root test, Johansen's co-integration test, and Granger-causality test have been set down. The analysis concludes that all included variables like interest rates, inflation rate, trade openness, and foreign debt have considering co-integration between them. In the long run, all the variables except public debt have significantly correlated with GDP.The rate of interest is a key tool that is accessible to the government to interfere with the nation's monetary system. However, upward interest rates in the nation are suppressed stock returns and may consequence in increased debt expenses. Furthermore, that GDP has a relation between all the overall macroeconomic variables used in this analysis exempting external debt.
We analyze exchange rate and balance of payment crisis constraints when multilateral development banks (MDBs) lend, in hard currency, to national development banks (NDBs), for NDBs to onlend to investment projects. Investment projects may be “export-enhancing” (EXIPs), which generate hard currency, or “domestic-oriented” (DOIPs), which do not generate hard currency. To increase the proportion of onlending to DOIPs, MDBs should increase their refinancing to NDBs. Furthermore, MDBs have to reduce the interest rate charged on NDBs. In addition, high return EXIPs need to be financed, and more locally-produced supplies, in contrast with imported supplies, should be fostered.
This paper introduces a new database of financial crises, providing an important insight into the causes, duration, and consequences of different types of financial crises. Besides extending the systemic banking crises database by Laeven and Valencia (2020) to the period 1970–2019, we develop new approaches for the identification of currency and sovereign debt crises, which we regard as preferable in some respects to those in the literature. Covering 206 countries, our crises database draws on 151 systemic banking crises (1970–2019), 414 currency crises (1950–2019), 200 sovereign debt crises (1960–2019), 75 twin crises (1970–2019), and 21 triple crises (1970–2019). We provide evidence that banking and debt crises tend to coincide or precede currency crises, while debt crises and banking crises are less likely to coincide with or precede each other. We also find that advanced countries experienced longer banking crises but shorter currency, debt, twin, and triple crises.
In recent years, Fund staff has prepared cross-country analyses of macroeconomic vulnerabilities in low-income countries, focusing on the risk of sharp declines in economic growth and of debt distress. We discuss routes to broadening this focus by adding several macroeconomic and macrofinancial vulnerability concepts. The associated early warning systems draw on advances in predictive modeling.
يهدف هذا البحث إلى دراسة تأثيرات الأزمة المالية العالمية على الاقتصاد السعودي. وذلك من خلال القنوات الاقتصادية والمالية التي تربط الاقتصاد السعودي بالاقتصاد العالمي خصوصا الغربي منه. وبناء على آلية السيولة الدولية وعلاقتها بصافي الصادرات وبالدخل القومي، وبالاعتماد على قاعدة بيانات تمتد من 1968 إلى 2009، تم تقدير نموذج حركي بنيوي يعتمد على تأويل الصدمة البنيوية للسيولة الدولية أي لإجمالي الأصول الاحتياطية كصدمة في الأسواق المالية الخارجية من جهة وكصدمة في السياسة النقدية والمالية للحكومة من جهة أخرى.
أوضحت النتائج أنه عند حدوث صدمة سالبة في السيولة الدولية نتيجة لانخفاض أسعار الأصول على سبيل المثال، فإنها تؤدي بشكل فوري إلى تراجع الناتج خلال السنة الأولى، بينما يعاود النمو بمعدلات جد منخفضة خلال السنوات اللاحقة. ويتضح كذلك إمكانية زيادة صافي الصادرات عند الانحراف المعياري الأحادي السالب للسيولة الدولية، أي كلما تم تخصيص مزيد من هذه الموارد المالية المتوفرة، حيث يرفع معدل النمو الاقتصادي الحقيقي وتتراجع بعض الواردات نتيجة لزيادة إنتاج بدائل الواردات محليا. ومن المتوقع أن يؤدي كل ذلك إلى التخفيف من أثر التخمة الادخارية Saving Glut Effect)) في الاقتصاد السعودي، كما أن الصدمات المحتملة مستقبلا لن يكون لها إلا أثر عابر على الاقتصاد المحلي خاصة عندما تفتعل السلطات النقدية صدمة سالبة على إجمالي الأصول الاحتياطية بالخارج مع الاحتفاظ بالحد الأدنى منها، وذلك بهدف تحويل تدفقاتها من باقي العالم إلى الاقتصاد المحلي والإقليمي.
Link: http://iesjournal.org/arabic/Docs/33.pdf
Krizlere karşı
erken uyarı sistemleri çerçevesinde, öncü göstergelerin neler olduğunun
belirlenmesiyle, kriz olasılığını bertaraf etme veya gerekli önlemleri alma
konusunda uygun politika seçimleri ve uygulamaları, ülke ekonomileri için en
önemli unsurdur. Özetle, kriz olasılıklarına karşı her ne kadar erken uyarı
sistemleri önemli bilgiler vermekte ise de, bu bilgiler doğru politikalarla
yönetilmiyorsa, “ekonomilerin krizlerden korunması”, kavram olarak yeterli
olmayacaktır. Bu noktada, elde edilecek ön bilgilerin iyi değerlendirilmesi ve
oluşturulacak politikaların doğru bir zamanlamayla uygulanması gerekir. Çalışmanın ana çerçevesi finansal krizlerin
nedenlerini, kriz modelleri ışığı altında incelemektir. . Bu çalışma özellikle
para ve finansal kriz alanında ampirik araştırmalar yapacak araştırmacılara
kaynak oluşturma amacını taşımaktadır.
This study constructed a banking system stability index (BSSI) for Nigeria, using a combination of financial soundness indicators and macro-fundamentals. It applied statistical and Conference Board Methodology normalisation processes on Nigeria’s banking and macroeconomic data from 2007Q1 to 2012Q2. The resultant index traced fairly well the episodes of crisis in the system over the study period. Hence, the BSSI is capable of acting as an early warning mechanism of signaling fragility. It could, therefore, be used as a complimentary regulatory policy tool to detect potential threat to enable monetary authorities take timely pre-emptive policy measures to avert crisis
Article History Keywords Signal extraction Financial crisis Threshold Indicator. JEL Classification: C53, G01. Using signal extraction, this study identifies leading indicators of financial crisis over the period 1980-2015 in developing and advanced economies. The study evaluates vulnerability in the external, public and financial sector in developing countries. The results postulate that the level of imports is the principal leading indicator for detecting a forthcoming crisis in developing nation's external sector. In the public sector, the best indicators for predicting a crisis in South Africa are in the order: maturity of debt; external debt; debt-GDP ratio; interest rate payments; short-term debt and government expenditure. In Namibia, the best indicator for predicting crisis is total expenditure and interest rate payments. Comparatively, Russia's crises are better predicted by the following variables: debt ratio; interest rate payments; short-term debt; expenditure and external debt. The two best indicators were debt ratio and interest rate payments. In the financial sector, the common risk indicator among developing economies is the lending rate. The external balance sheet assessment shows that in developed countries, predictors of a financial emanate from portfolio investments and direct investments. For the UK, the best indicators of a looming financial crisis are: direct investment liabilities; portfolio debt liabilities and direct investment debt instruments. Contribution/Originality: This study is one of the first contributions in early warning systems that assesses vulnerability in multiple sectors of an economy which are external, public and financial sectors. To the best of the author's knowledge, this study is also the first to determine external balance sheet assessment in developed nations.
Konačno izvješće pod nazivom "Pokazatelji međunarodne likvidnosti i sustav ranog upozoravanja financijskih kriza" daje rezultate istraživanja osjetljivosti hrvatskog ekonomskog i financijskog sustava na razne poremećaje. Izvješće donosi pregled postojećih teorija financijskih kriza i pregled glavnih metodoloških i empirijskih radova koji su tragali za uzročnicima financijskih poremećaja u dosadašnjim kriznim epizodama. Cilj je ovog istraživanja, kao i svih sličnih empirijskih pokušaja, izrada efikasnog sustava indikatora za praćenje osjetljivosti domaćeg financijskog sustava, te za rano prepoznavanje financijskih (valutnih i/ili bankarskih) poremećaja u Hrvatskoj. Takvi sustavi pokazatelja upozoravaju na pogoršanje brojnih ekonomskih i financijskih varijabli mjesecima prije izbijanja krize, pružajući nosiocima ekonomske politike dovoljno vremena da promjenom instrumenata i mjera izbjegnu financijske poremećaje ili barem ublaže njihove posljedice. Ovo izvješće u svom empirijskom dijelu opisuje prve takve sustave pokazatelja za Hrvatsku, koji će se u nastavku istraživanja usavršavati i koristiti u raznim složenijim analizama i provjerama njihove efikasnosti.
This paper deals with the relevance of the monetary regulation based on a large financial liberalization. The stylized fact studied is the Turkish crisis of 2000-2001. We suggest an analytical grid in terms of confidence which is defined following three logics: hierarchical, methodical and ethical. While the well-known credibility approach, founded on the New Classical disinflation policies, does only consider the problems of transparency and accountability of monetary policies, our thesis is that the ability of the economic policies to prevent the crises depends on the state of confidence in the viability of the monetary regime. The efficiency of the financial liberalization policies is linked to the legitimacy of the followed monetary system and then it relates back to a problem of collectively relevant management of the confidence in money. The analysis of both the liberalization process of the Turkish banking and financial sector and the monetary policies between 1980 and 2007 shows that the monetary stability founded on the anchoring of the exchange rates and on the competition may turn out to be illusory. The sole credibility modelled on a restrictive monetary policy, even if it follows a constrained discretion framework, does not seem to be sufficient to reform and to stabilize a highly fragile monetary system. It takes a long time and fickle conditions to restore the confidence of economic agents in the monetary system while the crisis can occur following few bad news.
Interconnections between banking crises and fiscal crises have a long history. We document the long-run evolution from classic banking panics toward modern banking crises where financial guarantees are associated with crisis resolution. Recent crises feature a feedback loop between bank guarantees and bank holdings of local sovereign debt thereby linking financial to fiscal crises. Earlier examples include the crises in Chile (early 1980s), Japan (1990), Sweden and Finland (1991), and the Asian crisis (1997). We discuss the evolution in economic theorizing on crises since the 1950s, and then provide an overview of the long-run evolution of connections between different types of crises. Next we explore the empirics of financial crises. We discuss the methodological issue of crisis measurement encompassing the definition, dating, and incidence of financial crises. Leading datasets differ markedly in terms of their historical frequency of crises leading to classification uncertainty. There is a range of estimates of output losses from financial crises in the literature, and these are also dependent upon definitions. We find economically significant output losses from various types of crises using a consistent methodology across time and datasets. Predicting crises also remains a challenge. We survey the Early Warnings Indicators literature finding that a broad range of variables are potential predictors. Credit booms have been emphasized recently, but other factors still matter. Finally, we identify a new policy trilemma. Countries can have two of the following three choices: a large financial sector, fiscal bailouts devoted to financial crises, and discretionary fiscal policy aimed at raising demand during the recessions induced by financial crises.
This chapter presents two early warning system (EWS) models, one for currency crises, the other for banking crises. The two models follow the signaling approach pioneered by Kaminsky and Reinhart (1999). They are estimated using monthly data of six East Asian countries—Indonesia, Republic of Korea (Korea), Malaysia, Philippines, Singapore, and Thailand—and, therefore, may be considered “regional models.” In contrast, empirical EWS models reported in existing studies were often estimated using data of 20–30 countries, including both developed and developing countries, and thus can be considered “global models.”
The Mexican crisis of 1994–1995 followed by the East Asian crisis of 1997–1998 and the other crises in Brazil, Russia and Turkey in 1999–2000 have generated a great deal of academic and policy interest in the causes of currency crises in emerging and developing economies. The main focus of this literature has been on whether the crisis was “inevitable” (first generation models) or “self-fulfilling” (second generation models). A common element in both these two genres of crisis models is that, if a speculative attack is successful in breaking down the currency peg, the resulting devaluation ought to mark the end of the crisis. Real devaluation, according to the conventional view, would have expansionary effects because it increased the demand for tradables (Dornbusch 1988). In practice, the postdevaluation experiences have varied markedly among countries. Some countries, like Brazil, seemed to recover smartly following the initial devaluation of the real. Others underwent a considerable output contraction immediately following flotation of the respective currencies. Kamin and Rogers (2000) and Santaella and Vela (1996) confirm this (contraction) to have been the case for Mexico following the 1994–1995 crisis and Moreno (1999) shows it to have held for East Asia in general.2
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