Browsing by Subject "financial crisis"

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  • Vartia, Laura (1999)
    The purpose of this work is to examine the causes of financial crises. The analysis of this work is based on the recent empirical and theoretical studies. These studies have focused on the role of financial factors in the analysis of the crises. A deterioration in macroeconomic and financial indicators seems to be a common and essential sign for both banking and currency crises. A common view is that financial crises originate from weak financial fundaments which make the economy vulnerable to banking and currency crises. First, this work presents and analyses empirical and theoretical research on financial crises. It highlights the financial factors behind these crises. It also provides a review of the causes of financial crises and examines the circumstances under which the economy is vulnerable to financial crises. The main emphasis is on the international illiquidity of the financial system since it is a common feature of several financial crises and it is also argued to be a sufficient condition for banking and currency crises. International illiquidity is here determined as a mismatch of international liabilities and short-term foreign assets. Three specific factors explaining financial crises are worth mentioning. First, financial crises are usually associated with poorly designed and supervised financial liberalisation. Second, weak banking system, lending boom and expansive foreign borrowing are often related to these crises. Third, illiquidity of the financial system makes the whole economy more vulnerable to banking and currency crises. The work provides a theoretical framework for the analysis of international illiquidity. It presents a basic model constructed by Chang and Velasco (1998b) which contributes to the analysis of the factors behind the illiquidity problem. The model also serves as a measure of illiquidity. The main conclusion from the model is that short-term debt and foreign currency debt increases the mismatch of international liabilities and international liquid assets and thus, the possibility of a financial crisis. This work also studies international illiquidity in a framework of different exchange rate regimes. The major question then is: Can banking and/or currency crises be avoided under these regimes? The main conclusions based on the model of Chang and Velasco (1998a) are that under fixed exchange rate regime authorities have little means to prevent both banking and currency crises, whereas, in the case of flexible exchange rate regime avoiding both crises is possible, if there exists a lender of last resort. Finally the work serves as an empirical analysis of the financial crisis in Finland. The Finnish crisis is a good example of a classical financial crisis. The factors put forth in the recent research on financial crises fit rather well to the Finnish crisis. It also has several common features with other recent crises, in particular the Asian crises.
  • Palmén, Olli (Helsingfors universitet, 2012)
    The East Asian crisis of the 1990s was the result of a rapid economic expansion that stemmed from the liberalization of financial markets and growth promoting policies, which at the same time rendered the economies vulnerable to financial crises. In the wake of the crisis, the previous currency crisis models have been questioned for their usefulness in explaining the East Asian crisis. As a result, a third generation of currency crisis models have emerged, which emphasize the role of private sector balance sheets as the primary cause of the crisis. This thesis aims to study the causes of the crisis and capture its fundamental characteristics in a theoretical framework. The thesis considers a third-generation currency crisis model, in which nominal price rigidities, foreign currency liabilities in the private sector’s balance-sheets and borrowing constraints make the economy vulnerable to currency crises. At the heart of the model is the possibility of multiple equilibria, i.e., currency crises may be triggered by expectational shocks. If domestic prices are rigid in the short-run, a currency depreciation increases the value of foreign currency debt and decreases the private sector’s profits and net wealth. Since private sector borrowing and output are positively correlated with profits, a depreciation of the domestic currency decreases future output. Due to arbitrage in the foreign currency market, a decrease in future output causes the domestic currency to depreciate immediately. Therefore, if agents in the economy expect the currency to depreciate, the currency may in fact depreciate, and thus, an expectational shock may push the economy to a currency crisis equilibrium. The mathematical models presented in this paper are general equilibrium models. The primary sources of the thesis are the articles by Aghion et al. (2000, 2001, 2004), Bergman & Hassan (2008) and Ormaechea (2010). In addition, the thesis discusses the appropriate monetary policy to prevent this type of currency crises. It is shown that the central bank may prevent a currency crisis by supporting the nominal exchange rate by tightening monetary policy, if it does not hurt supply of credit to domestic banks. Hence, tight monetary policy is optimal if the benefits of a higher nominal exchange rate outweigh the costs of decreased borrowing and investment. It is also shown that the central bank alleviate the adverse effect on investment by supplying credit to domestic banks via the discount window. Furthermore, the thesis finds that tight monetary policy is optimal if the uncovered interest rate parity holds in the short-run. If monetary policy is unable to influence the nominal exchange rate, then loose monetary policy is optimal in preventing this type of currency crisis. The thesis finds that the fundamental reasons for the East-Asian crisis were substantial foreign currency borrowing as well as less developed financial markets. The theoretical model reveals that a high proportion of foreign currency liabilities relative to liabilities denominated in the domestic currency make the economy more vulnerable to a currency crisis, because it increases the adverse balance-sheet effects related to a depreciation. However, the less rigid prices are in the short-run, the less vulnerable the economy is to a currency crisis. If changes in the nominal exchange rate are passed through to domestic prices, the adverse effects of depreciation become less severe.
  • Hukka, Janne (2005)
    This study examines how propagation mechanisms for financial crises may emerge as an externality of financial institutions’ management of their assets and liabilities. Inherent to these activities is the incentive to control for the associated risks. It follows that institutions are exposed to one another’s economic fundamentals through various capital markets. Consequently, risk control activities may contribute to the formation of contagious channels. Through these, the effects of a local crisis can spill over to other regions. This implicit externality to some of the measures of risk management thereby necessitates a reassessment of their appeal. Among the constitutive principles of asset management is diversification of investment portfolios. Financial institutions limit their exposure to any particular risky prospect by holding multiple positions simultaneously. As long as the correlation between these is imperfect, the variability of portfolio returns is reduced. The average return to asset holdings remains the same. On the other hand, diversification increases inter-institutional connections in capital markets. A local crisis, by reducing returns to one position, may induce a risk-averse investor to liquidate other positions in her portfolio. Financial institutions of unrelated characteristics may thereby become exposed to one another through the medium of common third party investors. Financial institutions also undertake measures of liquidity management. The need for these stems from a maturity mismatch between their assets and liabilities. For instance, an unexpected local liquidity shock may necessitate a costly liquidation of some long positions. In particular, such risks are faced by commercial banks with many liabilities of uncertain maturity. Therefore, they typically pool the risk by participating in interbank loans markets. Banks with surplus liquidity provide credit for those unable to meet their short term liabilities. However, each interbank loan embodies a credit risk. A bank that becomes insolvent may default on its debt. The balance sheets of exposed creditors consequently deteriorate. This makes them more vulnerable to a crisis. The analysis is characterized by the theory of global games. In a framework of imperfect information, crises are viewed as a result of coordination failure among economic agents. Contagion emerges as an endogenous property of the framework, highlighting the externalities of the described risk management activities. Also, the likelihood of each outcome to agents’ coordination game is unique. The effect of contagion to the probability of a crisis can therefore be isolated from other factors. Given the contribution of portfolio diversification and interbank loans to emergence of contagion, this makes their reassessment possible. The most central sources in this investigation are Dasgupta (2004) and Goldstein and Pauzner (2004).
  • Lukkarila, Johanna (2004)
    The thesis analyses the factors determining the currency and financial crises in developing countries. It presents a survey on the theoretical and empirical literature of the currency and financial crises, and carries out an empirical study analysing the causes of the crises in 31 emerging market countries. Prior to the events of the 1990s, the government's expansive fiscal and monetary policies were thought to be causing currency crises. The speculative attacks of the early 1990s in Europe challenged that view, and the new explanations emphasized the government's trade-off between defence of the peg and other domestic policy objectives. Lately, along with the Asian crisis, the research has focused on financial sector as a trigger for crises. However, the recent crises in Argentina and Turkey illustrate the continuing importance of fiscal problems in precipitating crises. Moving towards the 2000s, the empirical research increasingly involved a search for common determinants of crises. The empirical study in Chapter 3 analyses the causes of currency and financial crises in 31 emerging market countries in 1980–2001. It estimates probit model using 23 macroeconomic and financial indicators. A number of conclusions emerge. Traditional variables such as unemployment and inflation, as well as several indicators of indebtedness such as private sector liabilities, public debt, and the foreign liabilities of banks raise the probability of a currency crisis. Differently from the existing literature the sample is divided into pre- and post-liberalisation period. The indicators of indebtedness become more important in predicting crisis during the post-liberalisation period, while the real variables diminish in significance. The importance of indicators of indebtedness is an interesting and novel result, and might indicate a structural change in the global capital markets. The issuance by the authorities or domestic agents of large amounts of financial liabilities may today easily lead to a sudden capital outflow and crisis. In conclusion, the results emphasise the need for a careful monitoring of various indicators of indebtedness. Given the high degree of international capital mobility, this is especially relevant for the emerging markets in general, and countries intending to liberalise, in particular. The most important references: Berg & Pattillo (1999a, 1999b), Goldstein, Kaminsky & Reinhart (2000), Kaminsky & Reinhart (1996, 1999), Eichengreen, Rose & Wyplosz (1995), Frankel & Rose (1996).
  • Lorenti, Angelo; Dudel, Christian; Myrskylä, Mikko (2019)
    Under the pressure of population aging the Italian pension system has undergone reforms to increase labor force participation and retirement age, and, thus, the length of working life. However, how the duration of working life has developed in recent years is not well understood. This paper is the first to analyze trends in working life expectancy in Italy. We use data from a nationally representative longitudinal sample of 880,000 individuals from 2003 to 2013 and estimate working life expectancy by gender, occupational category, and region of residence using a Markov chain approach. We document large and increasing heterogeneity in the length of working life. From 2003–2004 to 2012–2013, working life expectancy for men declined from 35.2 to 27.2 years and for women from 34.7 to 23.7 years, increasing the gender gap to 3.5 years. Both young and old were hit, as roughly half of the decline was attributable to ages below 40, half above 40. Working life expectancy declined for all occupational groups, but those in manual occupations lost most, 8.5 years (men) and 10.5 years (women). The North–South economic gradient widened such that men living in the North were expected to work 8 years longer than women living in the South. The fraction of working life of total life expectancy at age 15 declined to record lows at 40% for men and 34% for women in 2012–2013. Policies aiming at increasing total population working life expectancy need to take into consideration the socio-demographic disparities highlighted by our results.