International Financial Contagion: Why are Eastern Europe's banks not failing when everybody else's are?

While the Asian financial crisis spread to Russia and Brazil, the transition economies in Central and Eastern Europe (CEECs) are largely unaffected by international financial contagion. This is the more surprising considering that most economies have experienced severe banking sector problems in the past, that large bad loan ratios are still prevalent, that banking regulation and supervision are only slowly improving, and that stabilizing policies have slowly been eliminated. What insulated the CEECs from the recent wave of financial instability? To consider the counterfactual, we first provide a framework that links banking crises to financial deregulation. We then focus on a number of macro- and microeconomic factors, using data compiled from the IMF's International Financial Statistics, from the World Bank's World Debt Tables, and from the BIS's Consolidated International Banking Statistics. We first compare past experiences in CEECs with those in other emerging economies as a cross-sectional reference point. We then consider whether the situation in CEECs has changed since the last banking sector problems, in order to establish a reference point across time. Our results indicate that the factors leading up to past banking crises are generally different in CEECs from those in other emerging economies. However, in recent years, the characteristics of CEECs have become more similar to those of other emerging economies.     

An Institutionalist Framework for a Consistent Financial Regulation

Abstract:

In the light of recurrent systemic crises that financialized market economies have been experiencing since the 1980s, this article seeks to determine the conditions required for a regulatory framework apt to ensure financial stability. Drawing upon an Institutionalist Minskyian endogenous financial instability approach, the article studies the fragilities of liberalized finance and points to some policy alternatives able to lead to an alternative financial regulatory model that is consistent with macroeconomic stability. It argues that in a weak regulatory environment financial markets naturally generate instabilities that could turn into systemic crises. The analysis maintains that in order to deal with such crises, a tight supervision should be framed under the aegis of public authorities and suggests some rules to develop a relevant regulatory system through an open and democratic decision process. Two points then deserve particular attention: a macro-prudential approach that regards instability as a systemic (non-individual) issue, and a preventive approach that aims at preventing systemic-risk generating activities from taking control over the markets.     

金融发展、资本账户开放与金融不稳定——来自中国的证据

文章建立一个由金融发展程度、资本账户开放与金融不稳定指标组成的向量自回归(VAR)模型,利用中国1982~2005年的年度数据对这些变量的长期协整关系和短期的调整动力学进行相关的时间序列分析。模型的估计结果显示,对于中国来说,金融发展程度、资本账户开放和金融不稳定之间存在着长期的协整关系,但三者之间的影响程度和方向各不相同。所有结果均显示,无论从短期和长期看,金融发展程度对一国的金融稳定具有显著影响,对资本账户开放的进程也具有重要的影响。     

Financial Globalization,Financial Crises,and the External Portfolio Structure of Emerging Markets*

We study the transitional dynamics of financial integration in emerging economies using a two‐sector model with a collateral constraint on external debt and trading costs incurred by foreign investors. The probability of a financial crisis displays overshooting; it rises sharply initially and then falls sharply, but remains non‐zero in the long run. While equity holdings fall permanently, bond holdings initially fall, but rise after the probability of a crisis peaks. Conversely, asset returns and asset prices first rise and then fall. These results are in line with the post‐globalization dynamics observed in emerging markets, and the higher frequency of crises that they display.     

后危机时期国际金融格局的变动及其对美国经济的影响

2008年金融危机给世界经济带来了重大的影响,国际金融格局也发生了显著变化。本文主要分析了国际汇率体系、国际收支和国际储备体系、国别经济政策与国际间经济政策协调的变化。在后危机时期,美国经济也受国际金融格局变化的影响,包括美元中心地位的问题、“中心一外围”模式可持续性的问题和美国的国际经济领导权问题。本文得出的主要结论是：国际几种主要货币汇率波动增大,国际汇率体系弹性增大,国际收支总体失衡程度下降,美元为主的国际储备体系呈多元化趋势,先进经济体与新兴发展经济体的经济协调在加强,美元的霸权地位面临挑战,美国在国际分工中的中心地位在下降,美国在国际经济的主导地位也在逐渐下降,新兴经济体获得更多的话语权。     

Global financial cycle and Brazil’s financial integration

ABSTRACT

Recent studies have discussed the influence of the global financial cycle on capital flows to emerging and developing countries. This paper evaluates the relationship between the greater degree of financial integration, and macroeconomic performance over the last two decades in Brazil. The literature has highlighted the Brazilian experience as being paradigmatic among emerging countries regarding the relationship between financial integration and regulation of capital flows to deal with boom and bust cycles. Methodologically, we employ a vector autoregressive model with error correction that allows us to evaluate the cointegration between the variables. Our main hypothesis is that a greater degree of financial integration is associated with negative developments in variables such as gross domestic product, country risk, interest rates, and exchange rate volatility. In addition, this study presents a further contribution by observing the existence of the interaction between the consequences of financial integration and the global financial cycle. More specifically, we found that: (i) an increase in the degree of financial integration generates deeper effects in downward periods of the global financial cycle; and (ii) a decline in that cycle generates greater impacts when a higher degree of financial integration is present.     

Financial development and instability: The role of the labour share

This paper examines the role of the labour share in creating instability in a small open economy. We assume that financial markets are imperfect so that entrepreneurs are credit constrained, and that this constraint is tighter for low levels of financial development. Aghion, Bacchetta and Banerjee [Aghion, P., Bacchetta, P., Banerjee, A., 2004. Financial development and the instability of open economies. Journal of Monetary Economics 51, 1077–1106] have shown that as the degree of financial development increases, output rises but instability appears for intermediate levels of financial development. Crucially, they assume that labour is paid before production takes place, and hence crises are solely due to the increased cost of debt repayment as firms accumulate capital. We show that under the more reasonable assumption that wages are paid at the end of the period, changes in the labour share also play a role in eroding profitability. Our analysis also predicts that financial crises are associated with substantial movements in the sharing of value added between capital and labour.     

Financial openness and financial development: an analysis using indices

This paper examines the link between financial openness and financial development through panel data analysis on advanced and emerging market countries. Using indices, financial openness together with institutional and educational variables explains a large part of the variation in financial development across countries and over time. Our analysis demonstrates that different indexing strategies serve to find better measures for financial openness and financial development in comparison with the individual indicators used in the literature. Our principal-component-type financial openness index conveys a positive effect on financial development independent from the lag structure or specifications used.     

Globalization,Financial Liberalization and the Behavior of the Long Run Money Demand in the Bangladesh Economy

ABSTRACT

The paper estimates the long run demand for money function in the Bangladesh economy using cointegration and the Vector Error Correction Modeling (VECM) technique. The cointegration results suggest that although the process of globalization has shown no significant impact on money demand by the fact that the foreign interest rate is seen as statistically not significant, the financial liberalization has an important impact, reflected in the statistically significant role of domestic interest rate, in influencing both M1 and M2 money demand. An estimate of VECMs also reveals the fact that the short run speed of adjustment is moderately influenced by the financial reform measures to establish the long run relation between money balances, income and domestic interest rates. The phenomenon of credit constraint in the context of a developing country has shown no significant role in influencing money demand, which may imply that the stage of financial development is getting higher level in the Bangladesh economy. The existence of exchange rate depreciation in the cointegration relation with the expected sign suggests that currency substitution is now effective in the monetary sector and, therefore, its impact should be considered in the Bangladesh monetary policy matrix.     

Financial cycles in asset markets and regions

This paper provides a comprehensive analysis of financial cycles in asset markets and regions. Using a large sample of 38 advanced and emerging economies to enable a comparative assessment, the analysis conforms with the prevailing literature pertaining to the characterization of financial cycles in advanced economies, but finds that equity market cycles in emerging market economies (EMEs) in Asia, Latin America, and Eastern Europe may be a more useful gauge of the financial cycle compared to cycles in credit and property markets. Similar to more advanced economies, it is found that financial and business cycles in emerging economies are synchronized, albeit partially and with some cross-country heterogeneity. This underscores the importance for policy makers to be vigilant of interlinkages between real and financial sectors, pointing toward a need for carefully designed macroprudential policies. Finally, it is found that financial cycles in emerging markets remain vulnerable to global risk aversion in financial markets and spillovers from the US, thereby reinforcing the importance of continuing to strengthen domestic macroeconomic fundamentals, and develop further local financial sectors through targeted structural reforms.     

Financial market development and trade openness: evidence from emerging economies

International trade is said to be the engine of economic growth. Despite an enormous effort to explain this phenomenon, the relationship between financial market development and trade openness and integration into the world economy is still an enigma. This article investigates the relationship between financial market development and trade openness. To do this, we develop a long-run and short-run model (a bounds testing approach to cointegration) for 18 emerging economies over the period 1980 to 2011. Estimates from all models show that financial market development, including both the stock market and the banking sector, has significant effect on trade openness in both short-run and long-run phenomena in the majority of countries. Despite many similarities among emerging economies, additional evidence suggests that the link between either stock market development or banking sector development with trade openness works via each country’s specific structure.     

Policy Shifts and Financial Instability in Emerging Markets

We explain periods of financial instability following drastic policy shifts within a Hayekian framework. Hayek emphasized that prices, established via the market process, help market participants to form coherent expectations about the future and coordinate plans with one another. In this paper, we elaborate on how policy shifts may undermine planning based on price signals and exacerbate uncertainty about the future, which can contribute to financial instability. Based on our postulated framework, we clarify how financial liberalization in the 1980s/1990s and the recent discretionary monetary policies in the advanced economies may have contributed to recurring episodes of financial instability in emerging markets. In particular, this paper provides an explanation for (1) why we observe financial instability mainly shortly following financial liberalization, and (2) why financial developments in the emerging markets are sensitive to unexpected monetary policy changes in the advanced countries in the current zero‐interest rate environment.     

Exploring the nexus between financial openness and informational efficiency – does the quality of institution matter?

This article examines the empirical link between financial openness and informational efficiency of stock markets in 27 emerging markets. Improving on earlier papers, this study has used World Bank’s Worldwide Governance Indicators (WGI) as the proxy of institutional development in dynamic panel data models estimated by generalized method of moments (GMM). Our results show, first, financial liberalization by itself has no impact on enhancing efficiency of stock market. Second, for countries with high level of institutional development, the interaction of trade openness and financial openness become significant. Third, for the same group of countries, interaction effect of financial liberalization and institutional development leads to more efficiency in stock market. Hence, our finding demonstrates the utmost importance of institutional development and its role on liberalization. Our results conclude that institutional development and trade openness are pre-requisites for a country to benefit from financial openness. Our study further provides empirical evidence to theoretical model proposed by Basu and Morey (2005) that governance is the missing link between stock market efficiency and financial liberalization. Our findings suggest that policy makers in developing economies should enhance the quality of their institution in order to optimize the benefits of financial liberalization.     

Global Imbalances and the Financial Crisis: Reassessing the Role of International Finance

Global current account imbalances have recently been singled out by many as a key factor contributing to the global financial crisis. Current account surpluses in several emerging market economies are said to have put significant downward pressure on world interest rates, thereby fueling a credit boom and risk taking in major advanced economies with current account deficits (the “excess saving” view). We argue that this perspective on global imbalances bears reconsideration. We highlight two conceptual problems: (i) explaining market interest rates through the saving-investment framework; and (ii) drawing inferences about a country's cross-border financing activity based on observations of net capital flows. We trace the shortcomings of this perspective to a failure to consider the distinguishing characteristics of a monetary (credit) economy. We conjecture that the main macroeconomic cause of the financial crisis was not “excess saving” but the “excess elasticity” of the international monetary and financial system.     

National Standards for Financial Literacy: Rationale and Content

The National Standards for Financial Literacy describe the knowledge, understanding, and skills that are important for students to learn about personal finance. They are designed to guide teachers, school administrators, and other educators in developing curriculum and educational materials for teaching financial literacy. In this article, the authors explain the reasons for the development of the Standards by the Council for Economic Education and the work of economists, economic educators, and teachers to prepare them. They describe each of the six content standards and how they are supported by associated benchmarks at the fourth, eighth, and twelfth grades. The authors also discuss several valuable Standards’ features, including a focus on economic content and decision-making skills as the foundation for financial literacy.     

Policy uncertainty and international financial markets: the case of Brexit

ABSTRACT

This study assesses the impact of the Brexit probability on both the UK and on international financial markets, for the first and the second statistical moments. As financial markets are by nature highly interlinked, one might expect that the uncertainty engendered by Brexit also has an impact on financial markets in several other countries. We first estimate the time-varying interactions between UK policy uncertainty, which to a large extent is attributed to uncertainty about Brexit and UK financial market volatilities. Second, we use two other measures of the perceived probability of Brexit before the referendum, namely daily data released by Betfair and results of polls published by Bloomberg. Based on these data sets, and using both panel and single-country SUR estimation methods, we analyse the Brexit effect on levels of stock returns, sovereign CDS, 10-year interest rates in 19 predominantly European countries, and those of the British pound and the euro. We show that Brexit-induced policy uncertainty will continue to cause instability in key financial markets and has the potential to damage the real economy in both the UK and other European countries. The main losers outside the UK are the ‘GIIPS’ economies: Greece, Ireland, Italy, Portugal and Spain.     

金融自由化条件下我国非正规金融问题研究——兼论二元金融之间关系及其经济影响

近几年来非正规金融的发展问题受到普遍关注,已成为经济理论的热点问题之一。长期以来,我国大型企业与国有企业主要从正规金融获得信贷资金,中小企业主要从非正规金融获得信贷资金,形成了相对割裂的二元金融结构。学者们普遍认为金融抑制是我国二元金融产生的主要原因,弱化二元金融也成为了我国利率市场化改革的原动力。始于2011年初的温州债务危机使非正规金融进一步受到广泛关注。加强民间借贷的疏导与监管、推动金融改革与创新、实现非正规金融的阳光化与合法化等日益成为热点问题。     

Financial Instability and the Credit Crunch of 1966

In an article in this journal, Edwin Dickens criticizes the financial instability hypothesis of Hyman Minsky. He contends that ''financial instability theorists'' explain the financial crisis in the US in 1966 as due to the forced sale of securities by commercial banks, but that the 1966 crisis was not due to such sales. Therefore, he says that Minsky's financial instability hypothesis is contradicted. In contrast, this article argues that the 1966 crisis was initiated by the sale of securities by banks, but that such a development was not due to increased financial fragility, and thus was not a necessary aspect of the financial instability hypothesis. While the specifics of the 1966 crisis are somewhat of an exception, the general pattern of financial crisis in the postwar period in the US is powerfully explained by Minsky's financial instability hypothesis.     

Subordinated Financial Integration and Financialisation in Emerging Capitalist Economies: The Brazilian Experience

This paper analyses the recent changes in financial practices and relations in emerging capitalist economies (ECEs) using the example of Brazil. It argues that in ECEs these financial transformations, akin to the financialisation phenomena observed in Core Capitalist Economies (CCEs), are fundamentally shaped by their subordinated integration into a financialised and structured world economy. To analyse this subordinated financialisation, the paper draws on the framework of international currency hierarchies. It shows by means of two specific processes how the existence of a hierarchic international monetary system has changed the financial behaviour of domestic economic agents, and with it the structure of the financial system. The first process highlights the phenomenon of reserve accumulation and the changing behaviour of domestic banks. The second points to ECEs’ sustained external vulnerability and its impact on the operations of Brazilian non-financial corporations. The paper also shows that not only were these financial transformations shaped by ECEs’ subordinated financial integration, but also that it was these financialisation tendencies themselves which contributed to cementing existing hierarchies and further deepened existing asymmetries between ECEs and CCEs.     

The Financial Crisis and the Death (or Hegemony) of Development Economics

Development economics was the study of how to create the plumbing that would allow developing economies to become developed. The financial crisis leads us to question whether industrialized countries have the plumbing problem solved and thus leads us to question whether we need a development economics that is separate from macroeconomics. Indeed, it even leads us to question whether development economics should take as its goal the creation of the institutional plumbing that industrialized countries currently have. The consequence will be a blending of concerns that have been central in developing economies with the standard macro models. The blending can be seen as either the death of development economics or the hegemony of development economics.