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Factors influencing ER

VIEWS: 8 PAGES: 37

									The financial crisis 2007-2009




            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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      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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       Stock market crunches
 Rational expectations
 Growing productivity- assumptions
 Behavioral finance




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      Stock market crunches
 The source of speculative purchases
 Loans- payback constraints
 Influence on domestic demand




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        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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            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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           Banking crises
 „Toxic debt”
 The solvency of the banks
 Financial accelerator
 Credit amount expansion




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           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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          Currency crises
Banking supervision
 Official foreign reserves shifts
 The development of financial markets




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         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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  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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The origins of the crisis 2007-2009

 Expansionary monetary policy of the FED
 Law level of i%
 Low credit costs




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Expansionary monetary policy
        of the FED




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  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



                  International finance
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  The origins of the crisis 2007-2009

 Speculative bubble
 on the US housing
 market




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   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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  The origins of the crisis 2007-2009

 Financial innovations
 Leverages
 New risk management techniques




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  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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   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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  The origins of the crisis 2007-2009

 Global unequilibrium
 Financing US investments from foreign
 savings  global financial crisis




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        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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      The effects of the crises


 The spread between LIBOR and the FED
 reference i%
 Paulson plan
 Rescue plans in Europe



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 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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    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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                  „No boom no bust”




•   Source: Taylor, op. cit

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            Global saving glut???




Source: Taylor, op. cit   International finance
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    What prolonged the crisis?
Lack of liquidity?
Credibility crisis?
 Risk premium explaning the spread between
  LIBOR and the reference i%




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      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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      The excessive/insufficient
         regulation paradox
 Possible solutions
 Information disclosure
 Independence of regulatory authorities
 Regulation centralization
 Global standards


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     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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           Behavioral finance
 Szyszka (2009)
 An alternative approach to financial
  markets analysis
 Mistakes of market participants
 Psychological aspect




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          Behavioral finance
 Gready investors
 Risk underestimation
 Herding
 Limited rationality
 Mistakes of rating agencies


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     Preventing financial crises

 Preventing the occurence of bubbles
 Preventing banking crises
 Preventing currency crises




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               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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             Summing up
 Behavioral approach to the crisis
 Financial market psychology
 Preventing crises




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                           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


                                  International finance
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