Understanding International Financial Crises: A Primer Bryane Michael, Linacre College Note: All graphics used in this presentation have been downloaded from other sites. As far as I know, the laws are still unclear about the Use of web graphics. Please let me know if copyright is being Infringed and I will remove the graphic.

Global Financial Crises Global financial fires are spreading? Turkey: 2001 Mexico: 1994 Brazil: 1999 Russia: 1998 Asia: 1997 Argentina: 2002

Capital flows are on the rise…

La longue durée Bretton Woods (only 1 crisis) Inter-war Gold standard A growing problem? Source: Allen (2002) “modern era” Pre Reform era?

Some Basics

Getting Exchange Rates Right Inflation Foreign loans expensive Foreign investors hosed Governments fall Decreased export competitiveness Just right e (Up means Depreciation)

Central Banking AL e p D S

The piranha problem time reserves Dante line a b c Why not just cut and run?

Some More Basics Source:

East Asia

East Asian Crisis Crisis = Fundamentals + Animal Spirits inflation fiscal surpluses limited public debt high savings and investment rates Lots of FX reserves Role of “Multiple Equilibrium” Information cascade All Good Boys Do Fine Role of Twin crises…weak banks cause currency problems

Confidence Game Why not just cut and run? What they see…. …may not be what you have….

What a tangled web we weave…. firms banks Central Bank Intl investors Moral Hazard Bubbles Excess Risk Twin crises Confidence Games

…when the foreign investors leave… Source:

…and when empresarios grieve…

The Washington Consensus?

The Problem of Twin Crises Interest rates too high Hurt banking sector Interest rates too low Foreign investors want out Just right r

Contagion? Contagion: The spread of financial crises from one country to another. Possible causes: - Common Shocks (interest rates in the U.S., rise of US dollar to which currencies were pegged) - Competitive Devaluation - Trade Linkages - Investment Linkages - Illiquidity in International Financial Market, - Changing Investor Perceptions (Asian Models) - Shifted Tolerance of Risks

Toward a New Financial Architecture? Assessment Tobin Taxes Capital Controls Strengthen the IMF Bail-ins and cool-offs

Fiscal and Monetary Transparency Correlation Coefficient: 0.64 Monetary Fiscal Argentina Hungary Brazil Czech Rep. Chile 3India Malaysia Morocco Taiwan Colombia Philippines Isreal Poland Mexico S. Korea Peru 2Venezuela Sri Lanka Egypt Jordan Russia Thailand Indonesia 1Pakistan China Turkey All good governments do fine