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lec_15_110B - Economics110B WorldEconomic HistoryII...

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    Economics 110B  World Economic  History II Spring 2009 University of California, Davis Lecture 15: Financial Crises in the 1990s 
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    Today’s program Different types of Financial Crises The Crises of the 1990s: UK, Mexico, East Asia,  etc… Financial crises and what to do about them: Prediction, prevention and management
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    Readings Steven Radalet and Jeffrey Sachs, “The East Asian Financial  Crisis: Diagnosis, Remedies, Prospects,” Brookings Papers on  Economic Activity 1 (1998), pp.1-74. On smartsite or: http://www.earth.columbia.edu/sitefiles/File/about/director/docu ments/BPEA19981withRadelet- TheEastAsianFinancialCrisis.pdf Stanley Fischer, “The IMF and the Asian Crisis”  Article at the following address www.imf.org/external/np/speeches/1998/032098.htm 
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    Introduction Financial crises come in many shapes and sizes They have many causes First and second generation… We now have a new problem: the  credit channel  and  balance sheet  view of  crises. Self-fulfilling crises. Balance of payments (overvalued exchange rates) crises were prevalent in  the interwar and the 1950s Liquidity (self-fulfilling) crises have become more of an event now Examples of crises: UK (1992) East Asia (1997), and of course 2008/09 What to do about crises Prediction, prevention and management There are many plans for reforms Standards, supervision, IMF, bankruptcy courts, changing contracting practices There are three routes to reform Status quo, all new institutions, a mixed pragmatic approach
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    First Generation Crises: Problems in the  Balance of Payments A problem of excess credit or excessive spending  by the government At a certain point reserves will run out and a  devaluation will be necessary. Speculation helps hasten that moment.
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    Balance of Payments Crises: First  Generation The Setup Small open economy, perfect foresight, PPP, UIP Government has a steady deficit. CB has two  inconsistent  goals A) Monetizes a certain fraction of the debt—buys it B) Must defend the fixed exchange rate . The Attack The currency crisis/ speculative attack will happen at a time  that is a function of fundamentals.  Agents abruptly change local reserves for foreign reserves.  The money supply drops instantaneously
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    Second Generation Crises: Multiple  Equilibria The Setup   The government benefits from  surprise  depreciation The cost is exchange rate variability.
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