Exploring the transmission channels of contagious bank runs
Martin Brown, Stefan Trautmann, Razvan Vlahu, 10 April 2014
Contagious bank runs are an important source of systemic risk. However, with observational data it is near-impossible to disentangle the contagion of bank runs from other potential causes of correlated deposit withdrawals across banks. This column discusses an experimental investigation of the mechanisms behind contagion. The authors find that panic-based deposit withdrawals can be strongly contagious across banks, but only if depositors know that the banks are economically related.
Financial contagion – the situation in which liquidity or insolvency risk is transmitted from one financial institution to another – is viewed by policymakers and academics as a key source of systemic risk in the banking sector.
Topics: Financial markets
Tags: bank runs, banking, banks, contagion, experimental economics, financial crisis, financial stability, global crisis, systemic risk
Sustainable growth requires a long-term focus
Pascal Lamy, Ian Goldin, 28 March 2014
Excessive short-termism is always a problem for policy, but the Global Crisis has brought it sharply into focus. This column introduces a report that discusses how a shift to longer-term solutions is necessary and possible. A key message is that businesses as well as governments need to take a longer-term view. The report identifies ways to overcome the current impasse in key economic, climate, trade, security, and other negotiations.
Just when we thought high-frequency trading couldn’t get any faster, a US communications company is developing a high-speed laser network between the New Jersey data centres of the New York Stock Exchange and the NASDAQ stock exchange, to shave an additional few nanoseconds off high-frequency trading times.
Topics: Environment, Financial markets, Global crisis, International trade
Tags: climate change, corporate governance, environment, global crisis, growth, high-frequency trading, mark-to-market accounting, short-termism, trade
Uncertainty and the Great Trade Collapse: New evidence
Dennis Novy, Alan Taylor, 19 March 2014
The recent global crisis hit output, but the decline in international trade was twice as big. Standard models of trade fail to account for the severity of the event. This column proposes a new model that argues the great trade collapse was due to uncertainty. The uncertainty lead firms to postpone orders. As a result, trade declined substantially more than production. Data from the US for the past 50 years show quantitatively large effects of uncertainty shocks on the trade.
When the Great Recession hit with full force in 2008, many countries experienced a sharp decline in their economic output. However, the accompanying decline in international trade volumes was even sharper, and almost twice as big.
Topics: Global crisis, International trade
Tags: global crisis, great trade collapse
Foreign investors and crises: There is no safe haven for all seasons
Maurizio Michael Habib, Livio Stracca, 28 February 2014
At the peak of the Global Crisis, the US dollar appreciated and US Treasury yields fell, suggesting that foreign investors were purchasing US assets in general. Actually, they were fleeing only into short-term Treasury bills. This column discusses recent research showing that there are indeed no securities which are consistently a safe haven across different crisis episodes – not even US assets. However, a peculiarity of the US securities is that foreign investors do not necessarily ‘run for the exit’, even when a crisis has its epicentre in the US.
The resilience of the international status of the US dollar remains surprising (Frankel 2013). At the peak of the global financial crisis which started in the US, in particular in the last quarter of 2008, US treasury yields fell and the US dollar appreciated. This has created the impression of a stronger demand for US securities in general.
Topics: Financial markets, Global crisis
Tags: asset pricing, financial crisis, global crisis, home bias, portfolio flows, reserve currency, risk aversion, safe haven, US
Foreign bank lending during the Crisis: Evidence on branches vs subsidiaries
John Hooley, Glenn Hoggarth, Yevgeniya Korniyenko, 14 February 2014
The recent crisis revealed that lending by foreign banks can be more cyclical than that by domestic banks. This column presents research showing that bank ownership structure mattered, at least in the case of the UK. Foreign bank branches cut their lending more sharply than did foreign subsidiaries, thus, amplifying the domestic credit cycle. This finding suggests policymakers should pay close attention to risks that stem from foreign bank branches when they are ‘alive’, not only when they are ‘dead’ and pose an even greater financial instability.
Foreign banks contribute potentially large longer-term benefits to their host economies (see, for example, Claessens and van Horen 2012). But the experience of the recent crisis has revealed that their lending can be more cyclical than that of domestic banks (Cetorelli and Goldberg 2011, Claessens and van Horen 2012, De Haas and Lelyveld 2011).
Topics: Global crisis, International finance
Tags: foreign banks, foreign subsidiaries, global crisis, lending
China's growth, stability, and use of international reserves
Joshua Aizenman, Yothin Jinjarak, Nancy P. Marion, 5 January 2014
Before the financial crisis, the world economy was characterised by large and growing current account imbalances. Since the onset of the crisis, the current account imbalances of the US and China have decreased to half their pre-crisis levels. This column highlights the implications of the reduction in the current account surplus for China, and gives policy recommendations. A restructuring of the economy is needed, and reversing of policies that depress consumption and prevent real appreciation.
Topics: Global crisis
Tags: China, global crisis, global imbalances, US
Smart governance: solutions for today’s global economy
Nemat Shafik, 14 December 2013
Crises expose weaknesses in rules and institutions, and provide impetus for reform. Macroeconomic policy coordination was strong early in the financial crisis, but momentum slowed. There has been significant progress on financial regulation, yet major challenges remain. International safety nets have been reinforced – including a trebling of IMF resources. This column argues that ensuring the future effectiveness and legitimacy of the IMF, its member countries will need to agree on greater voice and representation for emerging market countries in the interest of a better managed global economy.
Making the case for smart governance
Global economic crises tend to reignite discussions of global governance and international cooperation. This is because crises lay bare the shortcomings of existing international rules and institutions. The recent crisis has been no different.
Topics: Global governance
Tags: financial crisis, global crisis, global governance, IMF
Scrapping subsidies during the Global Crisis – Evidence from Europe
Nina Leheyda, Frank Verboven, 5 December 2013
Scrapping subsidies were a popular policy to protect car sales in the beginning of the crisis. This column presents new research showing that the subsidies had a strong effect on stabilising sales, but only a small environmental impact. There may thus be more productive investments to stabilise the economy during times of crisis.
Many governments around the world have introduced scrapping schemes during the last financial and economic crisis. In Europe, they were especially popular during the year 2009. Governments aimed to counteract the sharply declining demand for cars, while at the same time promoting cleaner cars with lower CO2 emissions.
Tags: Cash for clunkers, Europe, global crisis, scrapping subsidies
Monetary policy will never be the same
Olivier Blanchard, 27 November 2013
The global crisis changed the face of monetary policy. This column, written by the IMF’s chief economist, reviews the main changes. It draws on contributions to a recent IMF conference on the topic.
Two weeks ago, the IMF organized a major research conference, in honour of Stanley Fischer, on lessons from the crisis. Here is my take. I shall focus on what I see as the lessons for monetary policy, but before I do this, let me mention two other important conclusions.
Topics: Monetary policy
Tags: global crisis, monetary policy
Is the Phillips curve alive and well after all? Inflation expectations and the missing disinflation
Olivier Coibion, Yuriy Gorodnichenko, 15 November 2013
During the Great Recession, advanced economies have not experienced the disinflation that has historically been associated with high unemployment. This column shows that using consumers’ (as opposed to forecasters’) inflation expectations restores the traditional Phillips curve relationship for recent years. Consumers’ inflation expectations are more responsive to oil prices than those of professional forecasters. The increase in oil prices between 2009 and 2012 may in fact have prevented the onset of pernicious deflationary dynamics.
“Prior to the recent deep worldwide recession, macroeconomists of all schools took a negative relation between slack and declining inflation as an axiom. Few seem to have awakened to the recent experience as a contradiction to the axiom.” (Bob Hall, 2013.)
Topics: Global crisis, Monetary policy
Tags: disinflation, expectations, global crisis, Great Recession, inflation, oil, Phillips curve