Global crisis

Jon Danielsson, Marcela Valenzuela, Ilknur Zer, 02 October 2015

Does low volatility in financial markets mean that another financial crisis is more likely? And should we be worried when everything is OK? This column presents the first empirical results that find a strong validation of Minsky's hypothesis – obtained from 200 years of historical cross-sectional data – that low volatility increases the likelihood of a future financial crisis by increasing risk-taking.

Luis AV Catão, Rui C. Mano, 29 September 2015

Sovereign governments re-entering capital markets after debt renegotiations pay an interest rate premium for past defaults. This column presents new evidence that suggests earlier studies have underestimated this premium. This is partly due to the narrow credit history indicators used in previous studies as well as the narrow data coverage. Correcting for these problems, a sizeable and persistent default premium emerges, and one which rises on the duration of the default. The new findings are consistent with the view that financial markets help discipline governments and rationalise why governments try hard not to default.

Paolo Mauro, Jan Zilinsky, 18 September 2015

The public narrative on austerity is shaped by simple scatter plots purporting to portray the large negative impact of fiscal ‘austerity’ on economic growth. This column argues that, while recognising concerns about causality, economists should systematically explore correlations and multiple regressions, and test their robustness. The results reveal a mixed picture, lending partial support to the notion that fiscal choices and output growth are empirically associated.

Nathan Sussman, Osnat Zohar, 16 September 2015

The 2014 decline in oil prices lowered short-run inflation. Before the Global Crisis, the medium-term correlation between oil prices and inflation was weak, but it has become much stronger since the onset of the Crisis. This column suggests that following the onset of the Crisis, inflation expectations reacted quite strongly to global demand conditions and oil supply shocks. The public’s belief in the ability of monetary authorities to stabilise inflation at the medium-term horizon has deteriorated.

Daniel Gros, 07 September 2015

The Eurozone crisis started as a sudden stop to cross-border capital inflows. This chapter suggests that countries with current-account surpluses did not endure lasting financial stress. The balance of payments crisis then became a public debt crisis, where the public debt which mattered was that owed to foreigners. Overall, the crisis proved much more difficult to deal with given the predominance of bank financing, thinly capitalised banks, the absence of a common mechanism to deal with failing banks, and the absence of a common lender of last resort.

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