Course in Financial Stability and Financial Crises
Brussels, Belgium
July 4 - 8 , 2005
Michael D. Bordo
Rutgers University
Course Description
The problem of financial crises, banking, currency and twin crises has been a major issue in recent decades. It is not a new phenomenon but can be traced back to early modern times. Indeed, the incidence of crises in the recent era of globalization is comparable to that in the previous era from 1880-1914. This course will focus on the issue of financial crises from an historical perspective. First it will survey the history of currency, banking and twin crises across the world for the past century and a half and present empirical evidence on crisis incidence, crisis severity, crises duration and crisis transmission.
The second objective of the course will be to survey the role of policy in dealing with crises. This will cover the three aspects of crises policy: crisis prevention, crisis management and crisis resolution. The historical perspective will focus especially on the evolution of the lender of last resort, on international rescues, on bailouts (fiscal resolution), and sovereign debt workouts.
Reading List
Background Readings: These readings will be of value to students before taking the course.
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.
* Michael D. Bordo, Currency crises (And Banking Crises) in Historical Perspective. Stockholm School of Economic Research Report No. 10 1998.
Jean Tirole, Financial Crises, Liquidity, and the International Monetary System. Princeton: Princeton University Press. 2002.
Lecture 1. A. Theories of Financial Crises
Theories of Banking,
Currency and Twin Crises and Crisis Contagion
This lecture will present both traditional and recent theoretical perspectives
on banking crises, currency crises, twin crises (the coincidence of banking and
currency crisis) and the international transmission of crises.
Readings
Jean Tirole, Financial Crises, Liquidity, and the International Monetary System. Princeton: Princeton University Press. 2002. Chapters 1 and 2.
Michael D. Bordo, Currency crises (And Banking Crises) in Historical Perspective, pages 1-21.
with Anna J. Schwartz 1996, "Why Clashes Between Internal and External Goals End in Currency Crisis, 1797-1994," Open Economies Review, Vol. 7, pp. 437- 68. NBER Working Paper No 5710. August 1996.
with Bruce Mizrach and Anna J. Schwartz 1998, "Real Versus Pseudo International Systemic Risk: Some Lessons from History," Review of Pacific Basin Financial Markets and Policies, Vol. 1, No. 1, March, pp. 31-58. NBER Working Paper No.5371. December 1995.
Robert Flood and Nancy Marion 1999, "Perspectives on Recent Currency Crisis Literature," NBER Working Paper No. 6380, January 1998, in International Journal of Economics and Finance, Vol. 4, No. 1, January, pp. 1-26.
Stijn Claessens, Rudiger Dornbusch and Yung-Chul Park. " " Chapter 2 in International Financial Contagion edited by Stijn Claessens and Kristin Forbes. Boston. Kluwer Academic press. 2001. Pp. 19-42.
Lecture 2:
Historical and Empirical Dimensions
This lecture will present a narrative on the historical experience of the
different kinds of crises considered in A above. It will also present empirical
evidence on the dimensions of crises (incidence, duration, depth, [economic
issues associated with crises]).
Readings
A. History of Crises
Charles P. Kindleberger, Manias, Panics and Crashes: A History of Financial Crises, New York: John Wiley, 1996.
Michael D. Bordo, Currency Crises (And Banking Crises) in Historical Perspective. Stockholm School of Economic Research Report No. 10 1998. Pp. 21-34.
B. Empirical Dimensions
with Barry Eichengreen, Daniela Klingebiel, and Maria Soledad Martinez-Peria 2001, "Is the Crisis Problem Growing More Severe?" Economic Policy April.
with Barry Eichengreen 2002, "Crises Now and Then: What Lessons from the Last Era of Financial Globalization?" NBER Working Paper No. 8716, January.
with Barry Eichengreen, "Is our Current International Economic Environment Unusually Crises Prone," Capital Flows and the International Monetary System, eds., David Gruen and Luke Gower, Reserve Bank of Australia (1999).
C.
Contagion in Historical Perspective
with Antu Panini Murshid 2001, “Are Financial Crises
Becoming More Contagious?” Ch.14 in International Financial
Contagion (eds.) Stijn Claessens and Kristin I. Forbes. Kluwer Academic
Publishers, Boston pp. 367- 403.
with Antu Panini Murshid 2002, “ Globalization and the Changing Patterns
in the International Transmission of Shocks in Financial Markets.”
NBER Working Paper No. 9010, June.
Paolo Mauro, Nathan Sussman and Yishay Yafeh 2002, “Emerging
Market Spreads: Then and Now.” Quarterly Journal of Economics 117
(2), pp. 695-733.
Lecture 3. Globalization and Financial Crises
This lecture will present both historical and empirical dimensions of financial globalization in the pre 1914 era compared to recent experience. It will also analyze the connection between globalization, the exchange rate regime and financial instability and crises.
Readings
A. Financial Globalization in Historical
Perspective
Michael Bordo 2003, “The Globalization of Financial
Markets: What Can History Teach Us?” in Leonardo Auernheimer (ed.) International
Financial Markets.
Maurice Obstfeld and Alan Taylor. “Globalization and Capital
Markets.” Chapter 3 in Michael D. Bordo, Alan M. Taylor and Jeffrey
G. Williamson (eds.) Globalization in Historical Perspective.
B. Globalization and
Financial Crises in Emerging Markets
1. Theoretical Background
Guillermo Calvo and Carmen Reinhart. “Fear of Floating.” NBER Working Paper No. 7993.
Barry Eichengreen and Ricardo Haussman. “Exchange Rates and Financial Fragility” In New Challenges for Monetary Policy, Kansas City Federal Reserve Bank of Kansas City. 1999 pp. 329-368.
Carmen Reinhart, Kenneth Rogoff, Miguel A. Savastano 2003, “Debt Intolerance” Brookings Papers on Economic Activity 1. pp 1-74
2. Historical Perspectives
Michael D. Bordo and
Marc Flandreau. “Core Periphery, Exchange Rate
Regimes and Globalization” in Michael D. Bordo, Alan Taylor, and
Jeffrey Williamson (eds.) Globalization in Historical Perspective.
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.” Barry Eichengreen, and Ricardo Hausmann, (eds.) Other People’s Money. Chicago: University of Chicago Press. NBER Working Paper No. 9841 (2005).
Marc Flandreau and Nathan Sussman. “Old Sins, Exchange
Clauses and European Foreign Lending in the Nineteenth Century,” Barry
Eichengreen, and Ricardo Hausmann, (eds.) Other People’s Money.
Michael D. Bordo and Christopher M. Meissner 2005, “Financial Crises, 1880-1913: The Role of Foreign Currency Debt.” NBER Working Paper No. 11173
Lecture 4. Policy Perspectives
This lecture will discuss the general issues of crises prevention, crisis management and crisis resolution. In particular we will focus on 3 topics: the lender of last resort and the international lender of last resort; international rescues versus bailouts; and sovereign debt workouts.
A. Background
*Michael D. Bordo 2003, "Market Discipline and Financial Crisis Policy: An Historical Perspective." Research in Financial Services: Private and Public Policy, Vol. 15. pp 154 - 82.
Jean Tirole 2002, Financial Crises, Liquidity, and the International
Monetary System. Princeton: Princeton University Press, Chapters 3-7.
B. Lender of Last Resort and International Lender of Last Resort
Michael D. Bordo 1990, "The Lender of Last Resort: Alternative Views and Historical Experience." Federal Reserve Bank of Richmond Economic Review, March.
Forrest Capie 1999, "Can there Be an International Lender of Last Resort?" International Finance, January.
Stanley Fischer 1999, "On the Need for an International Lender of Last
Resort." Journal of Economic Perspectives, Vol. 13 pp. 85-104.
C. Rescues versus Bailouts
Michael D. Bordo and Anna J. Schwartz 1998, "Under What Circumstances, Past and
Present, Have International Rescues of Countries in Financial Distress Been
Successful?" Journal
of International Money and Finance. Vol. 18 No. 4. August 1999, pp.
683-708. NBER Working Paper No. 6824, December.
with Anna J. Schwartz 2001, "Measuring Real Economic Effects of
Bailouts: Historical Perspectives on How Countries in Financial Distress Have
Fared With and
Without Bailouts." Carnegie
Rochester Conference Series on Public Policy. December 2000. Vol.
53. Pp81-16. NBER Working Paper No. 7701. May
.
D. Sovereign Debt Workouts
Barry Eichengreen 2002, Financial Crises: and what to do about them. New York: Oxford University Press.
Paolo Mauro and Yishay Yafeh 2003, "The Corporation of Foreign Bondholders." IMF (mimeo), April.
Michael D. Bordo, Ashoka Mody and Nienke Oomes 2004, “Keeping Capital Flowing: The Role of the IMF” NBER Working Paper 10834.
Carlo Cottarelli and Curzio Giannini 2002, “Bedfellows, Hostages, or Perfect Strangers? Global Capital Global Capital Markets and the Catalytic Effect of IMF Crisis Lending” IMF Working Paper 02/193.
F. Policy Lessons for the new EU entrants.
Susan Schadler, Paulo Drummond, Louis Kuijs, Zuzana Margasova, Rachel Van Elkan 2005, “Euro Adoption in the Accession Countries: Vulnerabilities and Strategies.” IMF Occasional Paper No. 234 Washington D.C. The International Monetary Fund.