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International finance 120181-1165 The financial crisis 2007-2009
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International finance 120181-1165 Lecture outline Definitions The origins of the crisis Possible explanations of the crisis- empirical evidence Preventing financial crises
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International finance 120181-1165 Financial crisis- definition Powerful shocks within the financial system which trigger a decrease or a deepening of the already ongoing production decrease
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International finance 120181-1165 Stock market crunches Rational expectations Growing productivity- assumptions Behavioral finance
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International finance 120181-1165 Stock market crunches The source of speculative purchases Loans- payback constraints Influence on domestic demand
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International finance 120181-1165 Speculative bubbles Growing deviation of the present values of prices/ER from their theoretical values till the moment of price collapse
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International finance 120181-1165 Banking crises The willingness of banks to grant loans Information concerning the situation of enterprises Moral hazard Negative selection of the borrowers
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International finance 120181-1165 Banking crises „Toxic debt” The solvency of the banks Financial accelerator Credit amount expansion
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International finance 120181-1165 Currency crises Will the CB be able to maintain the ER? 3 generations of currency crises 1 generation- Krugman 2 generation- Obstfeld 3 generation- eclectic model
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International finance 120181-1165 Currency crises Banking supervision Official foreign reserves shifts The development of financial markets
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International finance 120181-1165 Speculative attacks Speculation against fixed ER The mechanism of the attack The consequences of the attack Example: speculative attack on GBP in 1992
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International finance 120181-1165 The origins of the crisis 2007-2009 Excessive CA deficit in the USA Twin deficits in the USA Issuance of governement bonds- main purchaser- China
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International finance 120181-1165 The origins of the crisis 2007-2009 Expansionary monetary policy of the FED Law level of i% Low credit costs
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International finance 120181-1165 Expansionary monetary policy of the FED
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International finance 120181-1165 The origins of the crisis 2007-2009 Petrodollars as a source of global liquidity Supply shocks on the oil market Inflationary impulses i% increase difficulties to pay back loans Decrease of real estate prices
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International finance 120181-1165 The origins of the crisis 2007-2009 Speculative bubble on the US housing market
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International finance 120181-1165 The origins of the crisis 2007-2009 International banking deregulation Non- banking institutions- no regulation Subprime loans Adjustable rate mortgages Mortgage backed securities CDO Credit risk swap
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International finance 120181-1165 The origins of the crisis 2007-2009 Financial innovations Leverages New risk management techniques
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International finance 120181-1165 The origins of the crisis 2007-2009 The collapse of the bubble immediate real estate prices decrease Large losses in the financial sector Housing market crunch banking crisis economic crisis
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International finance 120181-1165 The origins of the crisis 2007-2009 Credibility crisis on the banking market Liquidity crisis Insolvency menace of numerous institutions FED rescue plans
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International finance 120181-1165 The origins of the crisis 2007-2009 Global unequilibrium Financing US investments from foreign savings global financial crisis
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International finance 120181-1165 The effects of the crises Decrease of i% by many CB CB actions coordination- market signaling Expansion of the crisis into the real economy
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International finance 120181-1165 The effects of the crises The spread between LIBOR and the FED reference i% Paulson plan Rescue plans in Europe
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International finance 120181-1165 From stock market crunch to debt crisis Reinhart, Rogoff 2010 Debt as a signal of banking crises Governements fuelling credit booms Banking crises as a signal of debt crises Hidden debt as accelerator
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International finance 120181-1165 The governement’s and CB’s actions Taylor 2009 The expansionary monetary policy of the FED as the main reason for the crisis Global saving glut ??? What prolonged the crisis?
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International finance 120181-1165 „No boom no bust” Source: Taylor, op. cit
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International finance 120181-1165 Global saving glut??? Source: Taylor, op. cit
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International finance 120181-1165 What prolonged the crisis? Lack of liquidity? Credibility crisis? Risk premium explaning the spread between LIBOR and the reference i%
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International finance 120181-1165 The excessive/insufficient regulation paradox Aizenman 2009 Regulation thresholds Dependence of the regulation strictness on the length of the period without a crisis Regulatory behaviour 2 paradoxes
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International finance 120181-1165 The excessive/insufficient regulation paradox Possible solutions Information disclosure Independence of regulatory authorities Regulation centralization Global standards
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International finance 120181-1165 Early warning indicators Frankel,Saravelos (2010) Explainig the crises with several economic values fluctuations Past ER developments The level of foreign reserves
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International finance 120181-1165 Behavioral finance Szyszka (2009) An alternative approach to financial markets analysis Mistakes of market participants Psychological aspect
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International finance 120181-1165 Behavioral finance Gready investors Risk underestimation Herding Limited rationality Mistakes of rating agencies
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International finance 120181-1165 Preventing financial crises Preventing the occurence of bubbles Preventing banking crises Preventing currency crises
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International finance 120181-1165 Summing up The definitions and elements of the financial crisis The origins of the fiancial crisis 2007-2009 The role of the governements, CB and regulatory authorities Changes in financial supervision
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International finance 120181-1165 Summing up Behavioral approach to the crisis Financial market psychology Preventing crises
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International finance 120181-1165 References A. Sławiński, Rynki finansowe, PWE, Warszawa 2006 P. Krugman, M.Obstfeld, International economics: theory and policy, Pearson, Addison Wesley, Boston 2009, J. A. Frankel, G. Saravelos, Are Leading Indicators of Financial Crises Useful for Assessing Country Vulnerability? Evidence from the 2008-09 Global Crisis, NBER Working Paper No. 16047, Cambridge 2010, J. Aizenman, Financial Crisis and the Paradox of Under- and Over-Regulation, NBER Working Paper No. 15018, Cambridge 2009, J. B. Taylor, The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong, NBER Working Paper No. 14631, Cambridge 2009, C. M. Reinhart, K. S. Rogoff, From Financial Crash to Debt Crisis, NBER Working Paper No. 15795, Cambridge 2010 A. Szyszka, Behawioralne aspekty kryzysu finansowego, Bank i Kredyt 40 (4), Warszawa 2009
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