ITF-270 - Financial Crises: Concepts and Evidence
Spring 2013
Syllabus
These are the readings for ITF-270. For the more technical readings, the focus in this course will be on understanding the main points of the analysis--not in replicating the model and/or econometric methodology of the paper. This course tries to balance theoretical concepts, empirical applications and policy issues. There is an emphasis on the historical experience. For each topic you will find theoretical and empirical papers, some are older classics and others are of more recent vintage. References for useful texts and readings for your individual assignments will be discussed separately on a one-on-one basis.
In addition to the readings, you are expected to follow current events in the financial press, such as The Economist and the Financial Times. Regular visits to the International Monetary Fund’s website, http://www.imf.org/external/index.htm, and news and readings therein are encouraged.
Description:
This course covers topics on currency, banking, inflation, and debt crises as well as international financial contagion. Issues pertaining to monetary/financial, exchange rate, debt restructuring, and fiscal policy in connection with the antecedents and aftermath of crises are studied at both the theoretical and empirical levels. The role of current account dynamics, international capital flows, financial integration, and world commodity price cycles as these relate to recurring economic booms and busts are analyzed. The empirical evidence studied is global in scope, drawing from the experiences and crises episodes of advanced and emerging market economies across all regions. The historical coverage spans many of the pre-World War II crises episodes to the modern-day emerging market crashes of the 1990s and the unfolding banking and debt crises of the advanced economies. Prerequisites: A previous course in macroeconomics is highly desirable.
Grading:
There will be a short midterm exam (in class) to review basic concepts. It will consist of short essay questions.
You are expected to select a country for which you will monitor throughout the semester relevant economic and political developments. In two policy memoranda (see below) you are expected to apply the general analytical tools discussed in the class lectures to the specific situation or a particular policy issue in your country of choice (cross country comparisons can be a part of this analysis).
A 5-7 minute verbal “country briefing” to the class will be scheduled during the semester.
Your grade for the course will be determined as follows:
Short mid-term exam (in class) 30%
Policy memorandum on early warnings 25%
Policy memorandum on crisis resolution
OR post mortem on a past crisis episode 30%
General class participation and preparedness
and verbal debrief to class 15%
Information sources on the web
You will find some of my recent papers and data at my web site: http://www.carmenreinhart.com. Many of the articles in this reading list are available through JSTOR and REPEC. I will provide links where possible.
Readings:
Carmen M. Reinhart and Kenneth S. Rogoff (2009) This Time It’s Different: Eight Centuries of Financial Folly. (Princeton: Princeton University Press, September 2009) is required for this course.
Carmen M. Reinhart, (2010) This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises, NBER Working Paper 15815, http://www.nber.org/papers/w15815
Financial crises, varieties, definitions, dating and sequencing
Reinhart and Rogoff, Part I, Chapters 1-3, pages 1-48.
Reinhart and Rogoff, Chapters 16 pages 248-274.
Kaminsky, G., and Carmen M. Reinhart, (1999) The Twin Crises: The Causes of Banking and Balance-of-Payments Problems, American Economic Review, Vol. 89 No. 3, June 1999, 473-500. http://ideas.repec.org/p/fip/fedgif/544.html
“From Financial Crash to Debt Crisis,” (with Kenneth S. Rogoff). American Economic Review, Vol. 101, No. 5, August, 2011, 1676-1706. http://www.nber.org/papers/w15795.pdf
First-generation models of currency and banking crises
Dooley, Michael. (2000). “A Model of Crises in Emerging Markets”, Economic Journal, January, 110 256-272. http://people.ucsc.edu/~mpd/EJCrisis.pdf
Early paper emphasizing the role of moral hazard
Krugman, Paul. "A Model of Balance-of-Payments Crises." Journal of Money, Credit, and Banking, August 1979, 11(3), pp. 311-25. http://www.macroeconomics.tu-berlin.de/fileadmin/fg124/financial_crises/literature/JMCB_11__1979__Krugman.pdf
Classic on policy inconsistency
Velasco, Andres. "Financial and Balance-of-Payments Crises." Journal of Development Economics, October 1987, 27(1/2), 263-83. Will post paper
This is first model of the twin crises.
Second generation and other models of currency and banking crises
Calvo, Guillermo. (1998). “Varieties of Capital-Market Crises.” in Calvo, and King (eds), The Debt Burden and its Consequences for Monetary Policy, (New York: Macmillan) http://ideas.repec.org/p/idb/wpaper/4008.html
Chang, Roberto and Andres Velasco, (2001). “A Model of Financial Crises in Emerging Markets,” Quarterly Journal of Economics 116(2), 2001, 489-517. http://qje.oxfordjournals.org/content/116/2/489.full.pdf+html
An open economy Diamond and Dybvig setting.
McKinnon, Ronald.I. and Huw Pill, (1997) "Credible Liberalizations and Overborrowing" American Economic Review Vol. 87, 1997, 189-203.
http://www.nber.org/chapters/c8557.pdf
Moral hazard and information asymmetries (link is to longer more readable version of the paper).
Obstfeld, M., "The Logic of Currency Crises." NBER Working Paper No. 4640, February 1994. http://elsa.berkeley.edu/~obstfeld/ftp/currency_crises/cc.pdf
These models emerged from the ERM crisis in Europe 1992.
Banking and currency crises: Evidence
Reinhart, Carmen M. and Kenneth S. Rogoff, Chapters 10, pages 141-173 and
Chapters 13-14, pages 203-239
Calomiris, Charles W. and Gorton, Gary. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," in R.Glenn Hubbard, ed., Financial markets and financial crises. Chicago, IL: University of Chicago Press, 1991, pp. 109-173 and
Gorton, G., "Banking Panics and Business Cycles," Oxford Economic Papers, 1988, 40, 751-781.
Demirgüç-Kunt, A.and E Detragiache (1998) “The Determinants of Banking Crises in Developing and Developed Countries,” IMF Staff Papers 45: 81–109.
Diaz-Alejandro, Carlos. “Good-Bye Financial Repression, Hello Financial Crash.” Journal of Development Economics, February 1985, 19(1/2), pp. 1-24.
A classic on the role of contingent liabilities.
Dornbusch, R., I. Goldfajn, and R. Valdés, “Currency Crises and Collapses,” Brookings Papers on Economic Activity, 1996.
Eichengreen, B., Rose, A.K. and Wyplosz, C., "Exchange Market Mayhem: the Antecedents and Aftermath of Speculative Attacks." Economic Policy, October 1996, 21(21) pp. 249-312.
Early warnings
Reinhart, Carmen M. and Kenneth S. Rogoff, Chapter 17, pages 277-292.
Kaminsky, G., S. Lizondo, and C.M. Reinhart, Leading Indicators of Currency Crises, IMF Staff Papers, Vol. 45 No. 1, March 1998, 1-48.
Also includes a survey of the empirical literature.
Frankel, Jeffrey and George Saravelos (2012) “Are Leading Indicators Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis,”, in Journal of International Economics 87, no.2, July, pp.216-31. http://www.hks.harvard.edu/fs/jfrankel/areleadingindicatorsuseful.pdf
Reinhart, Carmen M. and Kenneth S. Rogoff, (2004) The Modern History of Exchange Rate Arrangements: A Reinterpretation, Quarterly Journal of Economics, Vol. CXIX No. 1, February, 1-48. http://ideas.repec.org/p/pra/mprapa/14070.html
Stresses parallel markets as predictors of currency crashes.
Emphasis on credit cycles
Kiyotaki N. and J. Moore (1997). “Credit Cycles,” Journal of Political Economy, 99, 220-264.
Some theoretical motivation on boom-bust
Mendoza, Enrique and Marco Terrones (2012) An Anatomy of Credit Booms and their Demise, (September) NBER Working Paper 18379, http://econ-server.umd.edu/~mendoza/wp/w18379.pdf
Schularick, Moritz and Alan Taylor. (2012) “Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008,” American Economic Review 102 (April): 1029–61. http://people.virginia.edu/~amt7u/papers/w15512.pdf
Sovereign debt crises: Models and evidence
Reinhart and Rogoff, Part II, Chapters 4-6, pages 49-100.
Eaton, Jonathan, and Mark Gersovitz (1981) “Debt with Potential Repudiation: Theory and Estimation,” Review of Economic Studies 48 (2), April: 289-309, http://www4.ncsu.edu/~jjseater/PDF/Classes/784Eaton&Gersovitz_DebtRepudiation_REStud_Apr1981.pdf
A classic
Bulow, Jeremy and Kenneth Rogoff, "Sovereign Debt: Is to Forgive to Forget?" American Economic Review 79 (March 1989), 43-50.
Another classic
Aart Kraay & Vikram Nehru, 2006. When Is External Debt Sustainable?, World Bank Economic Review, Oxford University Press, vol. 20(3), pages 341-365. http://ideas.repec.org/p/wbk/wbrwps/3200.html
Rose, Andrew K., (2005) “One Reason Countries Pay their Debts: Renegotiation and International Trade.” NBER Working Paper 8853, March 2002.
http://ideas.repec.org/a/eee/deveco/v77y2005i1p189-206.html
Sturzenegger, Federico, and Jeromin Zettlemeyer, (2006) Debt Defaults and Lessons from a Decade of Crises (Cambridge: MIT Press, 2006).
Domestic debt issues and debt overhangs
Reinhart and Rogoff, Part III, Chapters 7-9, pages 101-138.
Reinhart, Carmen and Vincent R. Reinhart and Kenneth S. Rogoff (2012) Debt Overhangs: Past and Present, is in the Journal of Economic Perspectives, Summer. http://www.nber.org/papers/w18015
Arellano, Cristina, and Narayana Kocherlakota (2012) “Internal Debt Crises and Sovereign Defaults,” NBER Working Paper 13794, February. http://www.cristinaarellano.com/research
Private internal debt
Calvo, Guillermo A. (1989) “Is Inflation Effective for Liquidating Short-Term Nominal Debt?” International Monetary Fund Working Paper 89/2, January.
This paper helps explain the Reinhart-Rogoff puzzle of why countries inflate when the apparent tax base (high-powered money) is so small.
Calvo, Guillermo A. (1991) “The Perils of Sterilization,” IMF Staff Papers 38 (4), December: 921-926.
Historical perspective on varieties of financial crises
Kindelberger, Charles. Manias, panics, and crashes. (1978) New York, NY: Basic Books Inc.
A classic.
Eichengreen, Barry and Kevin H O’Rourke (2012) A Tale of Two Depressions-Redux http://www.voxeu.org/article/tale-two-depressions-redux
also Eichengreen, B and K O’Rourke (2010), A tale of two depressions: What do the new data tell us? February 2010 update, VoxEU.org, 8 March.
Models of International Contagion
Allen F. and D. Gale (2007) Understanding Financial Crises, Oxford University Press, 2007– chapter 10.
Calvo, G., "Understanding the Russian Virus: A Technical Supplement", in Guillermo Calvo Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?, (Cambridge, MA: MIT Press 2005).
Information asymmetries
Chari, V. V., and Patrick J. Kehoe, "Hot Money," Journal of Political Economy 111 (December 2003): 1262-92.
Herding
Gerlach, Stefan & Smets, Frank, 1995. Contagious speculative attacks European Journal of Political Economy, vol. 11(1), 45-63, March. http://ideas.repec.org/p/bis/biswps/22.html
Competitive devaluations
International Contagion
Eichengreen, B., Rose, A.K. and Wyplosz, C., "Contagious Currency Crises." Centre for Economic Policy Research (London) Discussion Paper No. 1453, August 1996.
Glick, R., and A. K. Rose, “Contagion and Trade: Why Are Currency Crises Regional?,” Journal of International Money and Finance, August 1999.
Emphasis on trade links
Kaminsky, G., and C.M. Reinhart, (2000) On Crises, Contagion, and Confusion, Journal of International Economics, Vol. 51 No. 1, June, 145-168.
Emphasis on financial channels links-especially banks.
Kaminsky, G., C.M. Reinhart, and C.A. Végh The Unholy Trinity of Financial Contagion,, Journal of Economic Perspectives, Vol. 17 No. 4, Fall 2003, 51-74.
Role of surprises and leverage
Contractionary Devaluations
Cespedes, Luis, Roberto Chang, and Andres Velasco, "IS-LM-BP in the Pampas" IMF Staff Papers, Vol. 50. 143-156.
Simple framework to stress link between financial fragility and impact of devaluations.
Calvo, Guillermo A. and Carmen M. Reinhart, Fear of Floating Quarterly Journal of Economics, Vol. CXVII No. 2, May 2002, 379-408.
Frankel, Jeffrey, (2005) "Contractionary Currency Crashes in Developing Countries," in IMF Staff Papers, 52, no. 2, 2005. http://www.hks.harvard.edu/fs/jfrankel/ContractionaryCurrencyCrashesIMFSP.pdf
Surveys alternative theories/evidence.
Lizondo, S. and P. Montiel, "Contractionary Devaluation in Developing Countries: An Analytical Survey," IMF Staff Papers, March 1989. Another thorough survey paper.
Inflation and Credibility Issues
Reinhart and Rogoff, Chapters 11-12, pages 174-198.
Fischer, Stanley, Ratna Sahay, and Carlos A. Végh (2002) “Modern Hyper- and High Inflations,” Journal of Economic Literature, 40 (3), September: 837-880
Rebelo, S., and C.A. Végh, (1995) "Real Effects of Exchange Rate Based Stabilization: An Analysis of Competing Theories," NBER Macroeconomics Annual, 1995, 125-74.
Booms that end badly
Reinhart, C.M., and C.A. Végh, Nominal Interest Rates, Consumption Booms, and Lack of Credibility; A Quantitative Examination, Journal of Development Economics, Vol. 46, (1995), 357-378.
International Capital Flows, current account, and global imbalances
Reinhart, Carmen M., and Vincent R. Reinhart (2008) Capital Flow Bonanzas: An Encompassing View of the Past and Present in Jeffrey Frankel and Francesco Giavazzi (Eds.) NBER International Seminar in Macroeconomics 2008 (Chicago: Chicago University Press for NBER). http://ideas.repec.org/p/nbr/nberwo/14321.html
Links between capital flows and crises
Obstfeld, Maurice (2012) "Financial Flows, Financial Crises, and Global Imbalances" (January) Journal of International Money and Finance, http://elsa.berkeley.edu/~obstfeld/JIMF.pdf
Focus on current account imbalances
Eichengreen, B., "Trends and Cycles in Foreign Lending," in H. Siebert, ed., Capital Flows in the World Economy, (Tübingen, Mohr, 1991), 3-28.
Historical perspective.
Calvo, G.A., L. Leiderman and C.M. Reinhart, Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors, IMF Staff Papers, Vol. (1993).
Lucas, Robert E., 1988, “Why Doesn’t Capital Flow from Rich to Poor Countries?” American Economic Review, May 1990, pp. 92-96.
Reinhart, Carmen M. and Kenneth Rogoff, Serial Default And The “Paradox” Of Rich To Poor Capital Flows, American Economic Review 94, May 2004.
Alfaro, Laura, Sebnem Kalemli-Ozkan, and Vadym Volosovych, "Capital Flows in a Globalized World: The Role of Policies and Institutions,".in Capital Controls and Capital Flows in Emerging Economies, edited by Sebastian Edwards (University of Chicago Press, 2007).
Freund, Caroline, and Frank Warnock, .Current Account Reversals in Industrial Countries: The Bigger They Are, the Harder They Fall?. in G7 Current Account Imbalances, edited by Richard Clarida (University of Chicago Press, 2007).
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