International Institutions and International Financial Crises (chap 6) Flashcards
Frequently trigger of international financial crises :
- Macroeconomics imbalances
- Volatile capital flows
- usually is both at the same time but with in different degree
what kind of trigger is predominate in the Third Debt Crisis? (1980s) (description)
- Macroeconomics imbalances
- levels of government spending
- combine with poor taxation systems + poorly develop capital markets - spending financed by money creation
- Import substitution industrialization policies were widely used in low income countries
The Debt Crisis, show triggers of the crisis:
- inflation (Macroeconomics imbalance)
- At the same time, efforts to maintain a fixed nominal exchanges rates (to keep down prices of imported components by favoured industries and debt serving cost) - capital flight (Volatile capital flows)
- - overvaluation of currency (and punching power) cause the flight after everyone discover it. - exchange rate crisis (Macroeconomics imbalance)
- collapse of the currency
In general a Macroeconomics imbalance Crisis
which triggers had a mayor role in the East Asian Crisis?
- East Asian Crisis of 1997 Volatile capital flows played a mayor role
some had macroeconomics imbalances (Thailand South Korea)
soem had macroeconomics policies stables
all were affected through “contagion effect” (Volatile capital flows)
what is the “Herd effects”?
- Investors more their funds together
when the contagious effects happen? (finance sector view)
- It arise when the portfolio investment is very sensitive not only to interest rate differentials but also rumours.
what financial move the banks did before the East Asian Crisis?
- The crisis is worse if the banking sector borrows internationally short-term and lends locally long term (sometimes high risk ventures such as real estate speculation)
- The banks count on rolling over short-term debt but this may be difficult in crisis conditions
To avoid financial crisis, what a government can do domestically ?
- Moral Hazard
2. Exchange Rate Policy
what is “Moral Hazard” ? (financial sector)
- “Moral Hazard” refers to removing the cost of failure for the financial sector
- Can encourage irresponsible lending (such as high risk , high reward investments)
- Usually avoided but if loss is bears by the tax payers, the incentive is higher
- the problem is worse if the government rely on the credit system to support a specific industry ( Crony Capitalism )
what the Bank for International Settlements (B.I.S) do about “Moral Hazard”?
It design policies to reduce moral hazard
- Basel Capital Accord (1995) - know as Basel 1
- Basel 2 (2001)
- Basel 3 (2010)
what is the Basel Accords ?
- It include recommendations about Moral Hazards and specific such as capital requirements and information disclosure
- they are only recommendations and have not been adequately implemented
why in practice less developed countries prefer a fixed exchange rate or pegged ?
- By keeping import prices stable a fixed rate help to combat inflation
- Usually this institutions borrowing foreign currency, a decrease exchange would increase debt serving costs
what kinds of fixed exchange rate exists ?
- Crawling Peg
2. A hard Peg
what is Crawling Peg ?
- Is a currency that is “pegged” to the currency of a country with low rate of inflation (usually the dollar US)
- Is allow to periodically adjust
- The peg is supposed to be periodically adjust but in practice, is often allowed to became overvalued
what is the problem with Crawling Peg?
- The peg is supposed to be periodically adjust but in practice, is often allowed to became overvalued
for that reason:
- loss confidence (eventually)
- massive capital flight
