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. Chicago: University of Chicago Press.

 

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. Chicago: University of Chicago Press.  2003, pp. 121-183. NBER Working Paper No. 8846.

 

 

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 IntoleranceBrookings 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. Chicago: University of Chicago press. 2003 pp. 417-468. NBER Working Paper No. 8584.

 

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. Chicago: University of Chicago Press (2005).

 

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.

 

E. The Role of the IMF in Keeping Capital Flowing

 

Michael D. Bordo, Ashoka Mody and Nienke Oomes 2004, “Keeping Capital Flowing: The Role of the IMFNBER 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 LendingIMF 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.