BMSS 2006:
Financial Crises, Bubbles and Crashes
Description:
Financial crises are a recurrent feature in modern economies. There is strong reason to believe that they were as common in the 19th century as they are today. Yet why do they occur much more often in developing countries? And how did some countries manage to leave the problem behind? This course presents an overview of different types of financial crises – banking crises, currency crises, twin crises, and bubbles. It analyses when these types of shocks occur and traces their causes, using the modern tools of macroeconomic theory and the theory of international trade and finance. The empirical parts draw equally on modern and historical evidence, and try to confront the theoretical predictions systematically with the key stylized facts.
Readings:
Starred readings should be prepared before class. There are two per session. Students are encouraged to prepare summaries of these articles for class. The other material is relevant, but will be less important for classroom discussion.
Lecture notes:
I will make copies of my Powerpoint slides available AFTER each class.
Structure:
| session | date | Topic |
| 1 | 10-7 |
Have financial crises become more frequent? Key stylized facts and recent crisis episodes in Brazil and Argentina |
| 2 | 11-7 |
Contagion and Capital Controls |
| 3 | 12-7 |
Original Sin and Banking Crises |
| 4 | 13-7 |
Bubbles - Theory, Experimental Evidence, and the Nasdaq Bubble |
| 5 | 14-7 |
Historical Bubble Episodes and Policy Implications |
last updated: 31.05.06
Background Readings
Charles P. Kindleberger, Manias, Panics and Crashes: A History of Financial Crises, New York: John Wiley, 1996.
Barry Eichengreen, Financial Crises: and what to do about them. New York: Oxford University Press, 2002.
Jean Tirole, Financial Crises, Liquidity, and the International Monetary System. Princeton: Princeton University Press. 2002.
1 Have financial crises become more frequent? Key stylized facts and recent crisis episodes in Brazil and Argentina
The introductory session offers an overview of financial crises in the last 120 years -- their frequency, severity, and importance for economic policy. It gives students a brief summary of the development of crises models -- from first to second- and third-generation approaches, and then discusses three recent crisis episodes -- East Asia, Argentina and Brazil.
* Michael Bordo et al., 2001. "Financial Crises. Lessons from the last 120 years". Economic Policy.
Paul Krugman, 1998, "What Happened to Asia?" mimeo, January 1998.
Olivier Blanchard, Fiscal Dominance and Inflation Targeting, NBER working paper.
2 Contagion and Capital Controls
This session asks what we know about the interrelatedness of world capital markets. It introduces students to measures of contagion, examines its importance during financial crises, and asks if there is scope for the use of capital controls to quell crises. We will also discuss evidence on the negative side-effects of capital controls.
3 Original Sin and Banking Crises
This class discusses one source of vulnerability in developing countries that has recently been emphasized -- original sin. We then discuss suggestions for solving the problem, as presented by Barry Eichengreen in his contribution to the Copenhagen project. The second part of the class looks at banking crises. We start with the workhorse model, and then discuss recent extensions as well as historical micro-evidence on how bank-runs happen
Michael D. Bordo, Christopher M. Meissner and Angela Redish. "How Original Sin was Overcome: The evolution of external debt denominated in domestic currencies in the United States and the British Dominions 1800-2000." Rutgers University (mimeo) June 2003.
Franklin Allen, Douglas Gale, 1998, „Optimal Financial Crises“, Journal of Finance.
* Cormac O Grada, Eugene N. White, 2002, “Who Panics During Panics? Evidence from a Nineteenth Century Savings Bank”, American Economic Review.
4 Bubbles - Theory, Experimental Evidence, and the Nasdaq Bubble
When can asset prices deviate significantly from fundamentals? We review the most important contributions in the literature, and then discuss how experimental evidence has qualified our thinking about bubbles.
Allen, F. and D. Gale (2000), “Bubbles and Crises”, Economic Journal 110: 236-256.
Lamont, Owen and Richard Thaler, (2003), “Can the Market Add and Subtract? Mispricing in Tech Stock Carve- Outs ”, Journal of Political Economy. 111(2): 227-268.
5 Historical Bubble Episodes and Policy Implications
This class asks what we can learn from the famous bubbles of the past. We examine the South Sea bubble in 1720 and the 1929 stock market in particular. Finally, we will ask if central banks should attempt to prick bubbles.
* Temin, Peter and Hans-Joachim Voth. "Riding the South Sea Bubble". American Economic Review 94, 2004.