ec3332-SemII01011Lec10 (2)

ec3332-SemII01011Lec10 (2) - EC3332 Money and Banking I...

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EC3332 Money and Banking I Aditya GOENKA National University of Singapore April 6, 2011 Goenka EC3332 2010-2011 Lec 10
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Banking Crises Country Period Cost GDP (%) Country Period Cost GDP (%) Finland 1991-94 8.4 Indonesia 1997-8 80.0p Japan 1990s 20.0p Israel 1977-83 30.0 Spain 1977-85 16.8 Korea 1997-8 60.0p Sweden 1991 6.4 Malaysia 1997-8 45.0p USA 1980s 2.4 Thailand 1997-8 45.0p Chile 1981-3 41.2 Uruguay 1981-4 24.2 Argentina 1980-2 55.3 Venezuela 1994-5 18.0 Note: p is provisional. Source: Kaufmann (1999) Goenka EC3332 2010-2011 Lec 10
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Output Loss (1975-97) No. crises Avg. recovery Crises with Cum. loss time (Yrs) output loss (%) output (%) Currency Crises 158 1.6 61 7.1 Industrial 42 1.9 55 5.6 Emerging Markets 116 1.5 64 7.6 Currency Crashes 55 2.0 71 10.1 Industrial 13 2.1 62 8.0 Emerging Markets 42 1.9 74 10.7 Banking Crises 54 3.1 82 14.2 Industrial 12 4.1 67 15.0 Emerging Markets 42 2.8 86 14.0 Curr. & Bnkg. Crss. 32 3.2 78 18.5 Industrial 6 5.8 100 17.6 Emerging Markets 26 2.6 73 18.8 3 Goenka EC3332 2010-2011 Lec 10
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In USA nearly 10,000 bank failures in 1929-1933. Average of 12 bank failures per year until end 1970s. 2,400 bank failures in the 1980s. Between 1970-1997, there were 86 banking crises in 69 countries. More recently, bank run on Northern Rock (UK), failure of banks such as Bear Stearns, bankruptcy (HBOS) and nationalization of many others (Fortis, RBS). Goenka EC3332 2010-2011 Lec 10
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Role of Banks So far have, concentrated on: Liquidity provision - 3 period model. They perform a monitoring role of loans and act as “delegated monitors.” (D. Diamond) Other roles of banks: They may be more efficient in evaluating loans (J. Boyd and E. Prescott). Intertemporal insurance people do not know when they want to consume. Banks help in the providing liquid investments (D.Diamond and P. Dybvig). Goenka EC3332 2010-2011 Lec 10
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Bank runs in Diamond-Dybvig model Diamond and Dybvig ( J.P.E. , 1983). Depositary institutions are pools of liquidity that provide insurance against idiosyncratic consumption shocks. It explains the fractional reserve system - why banks may find it optimal to hold reserves on their own different from the central bank imposed reserve requirements. The free funds can be used for profitable investment. However, this itself can be a source of financial fragility. Goenka EC3332 2010-2011 Lec 10
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Bank runs in Diamond-Dybvig model: The Model One good, 3 period economy. Continuum of ex-ante identical agents. Each agent has one unit of good at t = 0 . The good is to be consumed at either t = 1 or t = 2 . Consumers face a liquidity shock as to when they consume. They may want to consume next period, OR the one after that. They do not know when the consumption opportunity will arise. Goenka EC3332 2010-2011 Lec 10
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The Model: Assets Goods can be consumed or stored in a liquid asset (money) or invested in a project. If good is stored the gross return is 1. One unit invested in period 0 yields L < 1 in period 1. One unit invested in period 0 yields R > 1 in period 2. t= 0 1 2 Liquid 1 1 1 Project 1 L<1 R>1 Goenka EC3332 2010-2011 Lec 10
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The Model: Utility Consumers do not know their “type” - either Type 1 (short-run) or Type 2 (long-run) consumers.
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This note was uploaded on 02/01/2012 for the course ECON 101 taught by Professor Meonk during the Spring '11 term at Abu Dhabi University.

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ec3332-SemII01011Lec10 (2) - EC3332 Money and Banking I...

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