ECON 455 Lecture 22 Financial Threats

ECON 455 Lecture 22 Financial Threats - Econ455: Economic...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 1 Econ455: Economic Development in China Lecture 22: April 4 Financial Threats Sandra Poncet Lorch Hall, room 207 Email: sponcet@umich.edu Office Hours: Mondays 16:30-18 & Wednesdays 10:30-12 2 Introduction Financial crises are not unique to current financial systems, of course; history is replete with banking and exchange rate crises Typical distinction: A currency crisis may be said to occur when a speculative attack on the exchange value of a currency results in a devaluation (or sharp depreciation) of the currency, or forces the authorities to defend the currency by expending large volumes of international reserves or by sharply raising interest rates. A banking crisis refers to a situation in which actual or potential bank runs or failures induce banks to suspend the internal convertibility of their liabilities or which compels the government to intervene to prevent this by extending assistance on a large scale. Asian Crisis was a twin crisis The crisis problem is one of the dominant macroeconomic features of our age.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 3 Introduction Can China suffer from an Asian like crisis? How likely is a crisis in China? Need for a panorama of Chinese weaknesses and strengths Need for a comparison of comparison of Asian and Chinese finances. Need for identify the potential triggers for a financial crisis 4 Lecture Outline Introduction I How economists understand crises A Typical features of currency crises B Two generations of crisis before the Asian Crisis C The Asian Crisis II Is a crisis plausible in China? A Unlikelihood of an Asian type crisis B But numerous fragilities C Potential triggers Conclusion
Background image of page 2
3 5 I How economists understand crises A Typical features of currency crisis 1 Typical cause: Balance of Payment (BP) unbalances Recall: Balance of payments should be always in equilibrium: BOP = 0 Typical adjustment: 2 cases: flexible or fixed exchange rate Flexible exchange rate: depreciation occurs so as to rebalance of current & capital account Typical problem: current account deficit (trade deficit) not compensated by capital inflows capital flows reversal: net outflow (for a given current account balance) Fixed exchange rate: need for devaluation (change in the peg) Currency crisis often come from the combination of unmodified fixed peg (overvalued currency) with inappropriate macro policies Trade deficit and net capital outflows are often the outcome of deterioration of competitiveness due to inappropriate macro policies: high domestic inflation overvalued exchange rate unsustainable fiscal deficit I How economists understand crises A Typical features of currency crisis 2 Implication of a fixed peg a Advantages of fixed peg Crawling peg Increasing flexibility Pure float Managed float Fixed peg with fluctuation bands Monetary union Dollarization /Euroization Fixed peg Currency board Less volatility/uncertainty: favorable to trade and financial transactions Stabilization:
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 14

ECON 455 Lecture 22 Financial Threats - Econ455: Economic...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online