Financial Crisis in Developing and Emerging Markets

Question 1

What are the proposed theories for currency crisis by Krugman?

Answer 1

Economic Fundamentals (Krugman)

pegged exchange rate
large foreign deficits
speculators deduce peg collapse
CB runs out of reserves trying to manipulate peg
=> peg collapse

Question 2

What are the proposed theories for currency crisis by Obstfeld?

Answer 2

Market Failure (Obstfeld)
herding and panic mode
multiple equilibria’s of capital flows
suspicion among speculators about sustainability of govt debt
cascading information => self fulfilling prophecies

Question 3

What are proposed reasons for banking crisis by Krugman and Calomiris?

Answer 3

Excessive expansionary monetary politics
Asset bubbles
Weak tax raising capacities and
Weak financial supervision and regulation

Question 4

What are proposed reasons for banking crisis by Obstfeld, Shin and Turner?

Answer 4

Financial markets as inherently unstable
Risk myopia and govt failure
Falling asset prices generate fire sell

Question 5

What are domestic political economy reasons for crisis?

Answer 5

1. personalization of politics and crony capitalism
2. weak checks and balances and rule of law
3. weak taxation, regulation and supervision

Question 6

What are developmental preferences reasons for crisis?

Answer 6

Preference for pegged exchange rates
Borrowing in foreign currency
Growth oriented with low regulation

Question 7

What do Danzman et al. (2017) have to say about the nature of financial crisis at a systemic level?

Answer 7

All crises are global in nature; the US enjoys a privileged position in the macro / financial order because they can delay adjustment through consistent capital inflows. When the US attracts much capital, less instability for emerging markets/. When US imports less capital, it goes towards developing countries rendering them more unstable