Topic 3 Financial Crisis (Research Paper 1)

Question 1

Aim of research paper (3)

Answer 1

Understand causes of crisis

How it spread.

Main lessons for reform.

Question 2

Causes: look at independent and dependent variables.

Considers Pre-crisis conditions, then economic performance>Find lessons for reform

Question 3

Motivation for this paper

Answer 3

Most severe financial crisis

Differences in time and magnitude

Question 4

Main contributions of the paper (3)

Answer 4

Identifies new independent variables

Identifies different dependent variables

Different sample of countries

Question 5

Pre-crisis conditions (3)

(found in previous papers, pre-established, commonly found)

2.Why was this crisis significant?

Answer 5

Sharp asset price increases
Credit booms
More NPL or lower CA (capital-asset) ratio

2. Time it lasted, and magnitude (starting with developed countries first)

Question 6

Sharp asset price rises example

Answer 6

House prices rose (asset price bubble)

Question 7

Pre-crisis conditions new to the financial crisis (4)

Answer 7

More sophisticated financial intermediaries and instruments

Reliance on wholesale and short term funding

Interconnectedness between countries

Household indebtedness

Question 8

Grouping of countries

Answer 8

Grouped countries in terms of time of their financial crisis into quarters.

E.g USA in Q1 where it occurred early.

Most developed countries first early, developing countries later

Question 9

Independent variables used (8) some old some new (to see which one caused the FC)

Answer 9

House prices (appreciation)
Credit-to-GDP ratio
Mortgage debt-to-GDP ratio
Wholesale funding dependence
Current account balance
Foreign bank claims
Trade openness
Log per capita income

Question 10

3 elements in the regression model

Answer 10

Time window

Independent variables

Dependent variables (macro and financial performance)

Question 11

Dependent variables used.

Split into macroeconomic performance indicators (3) and financial sector performance indicators (1)

Answer 11

Macro performance indicators
Duration-of negative GDP growth
Severity-cumulative decline in GDP
Decline in growth in crisis(08-09)compared to pre-crisis 03-07

Financial performance indicators
FSI (financial stress index)

Question 12

Findings: 3 main independent variables influenced duration, severity and decline.

(The 3 macro performance indicators)

Answer 12

Houseprice appreciation (positive relationship with duration and severity)

Growth in bank credit-to-GDP ratio (positive relationship)

Current account balance (negative relationship)

I.e increased house prices=increased duration and decline
More credit booms=longer duration
Current account deficit=longer duration

Question 13

Extra independent variables on dependent variables

Answer 13

Trade openness up=severity/decline in growth up

Foreign bank claims up=duration of crisis up

Question 14

Findings on financial sector performance (FSI): 4 which were significant

Answer 14

Domestic credit/GDP ratio was positive and significant.
(So stress greater in economies with financial deepening.
(Industries dependent on external finance are hurt most)
(So banks are key in relieving credit restraints)

House prices positive and significant

Mortgage debt/GDP ratio positive and significant

Trade openness was negative and MARGINALLY significant

Question 15

Conclusions of research paper (2)

Answer 15

Initial indicators explain macroeconomic performance indicators better than explaining financial performance.

Financial shock was of a systematic and global nature, affecting all financial markets equally

Question 16

Limitations of paper (2)

Answer 16

A one size fits all list. Not specific to all countries

Many unknown areas, extended policy research required