Bruno Biais, Jean-Charles Rochet, Paul Woolley, 21 August 2014

The Global Crisis has intensified debates over the merits of financial innovation and the optimal size of the financial sector. This column presents a model in which the growth of finance is driven by the development of a financial innovation. The model can help explain the securitised mortgage debacle that triggered the latest crisis, the tech bubble in the late 1990s, and junk bonds in the 1980s. A striking implication of the model is that regulation should be toughest when finance seems most robust and when innovations are waxing strongly.

Kris Mitchener, Kirsten Wandschneider, 18 August 2014

The IMF has recently revised its position on capital controls, acknowledging that they may help prevent financial crises. This column examines the effects of capital controls imposed during the Great Depression. Capital controls appear not to have been successfully used as tools for rescuing banking systems, stimulating domestic output, or for raising prices. Rather they appear to have been maintained as a means for restricting trade and repayment of foreign debts.

Nicola Gennaioli, Alberto Martin, Stefano Rossi, 19 July 2014

There is growing concern – but little systematic evidence – about the relationship between sovereign default and banking crises. This column documents the link between public default, bank bondholdings, and bank loans. Banks hold many public bonds in normal times (on average 9% of their assets), particularly in less financially developed countries. During sovereign defaults, banks increase their exposure to public bonds – especially large banks, and when expected bond returns are high. At the bank level, bondholdings correlate negatively with subsequent lending during sovereign defaults.

Pierre-Cyrille Hautcoeur, Angelo Riva, Eugene White, 02 July 2014

The key challenge for lenders of last resort is to ameliorate financial crises without encouraging excessive risk-taking. This column discusses the lessons from the Banque de France’s successful handling of the crisis of 1889. Recognising its systemic importance, the Banque provided an emergency loan to the insolvent Comptoir d’Escompte. Banks that shared responsibility for the crisis were forced to guarantee the losses, which were ultimately recouped by large fines – notably on the Comptoir’s board of directors. This appears to have reduced moral hazard – there were no financial crises in France for 25 years.

Marcus Miller, Lei Zhang, 26 June 2014

Like banks, indebted governments can be vulnerable to self-fulfilling financial crises. This column applies this insight to the Eurozone sovereign debt crisis, and explains why the ECB’s Outright Monetary Transactions policy reduced sovereign bond spreads in the Eurozone.

Jon Danielsson, Kevin James, Marcela Valenzuela, Ilknur Zer, 08 June 2014

Risk forecasting is central to financial regulations, risk management, and macroprudential policy. This column raises concerns about the reliance on risk forecasting, since risk forecast models have high levels of model risk – especially when the models are needed the most, during crises. Policymakers should be wary of relying solely on such models. Formal model-risk analysis should be a part of the regulatory design process.

Giovanni Cespa, Xavier Vives, 22 April 2014

Since capital flows to and from hedge funds are strongly related to past performance, an exogenous liquidity shock can trigger a vicious cycle of outflows and declining performance. Therefore, ‘noise’ trades – usually thought of as erratic – may in fact be persistent. Based on recent research, this column argues that there can be multiple equilibria with different levels of liquidity and informational efficiency, and that the high-information equilibrium can under certain conditions be unstable. The model provides a lens through which to interpret the ‘Quant Meltdown’ of August 2007 and the recent financial crisis.

Stijn Claessens, 18 April 2014

Stijn Claessens talks to Viv Davies about the recent IMF book titled 'Global Crises: Causes, Consequences and Policy Responses', co-edited with M Ayhan Kose, Luc Laeven, and Fabian Valencia. The book provides a comprehensive overview of current research into financial crises and the policy lessons learned. They discuss crisis prevention and management, and the crisis in the Eurozone. The interview was recorded in April 2014.

Matthieu Bussière, Gong Cheng, Menzie Chinn, Noëmie Lisack, 16 March 2014

The financial crisis that swept the global economy at the end of 2008 provides a natural experiment to test the proposition that international reserves are useful during crises. This column presents cross-country evidence based on a panel of 112 emerging and developing countries. Countries with more reserves relative to short-term debt fared better.

Petra Gerlach-Kristen, Rossana Merola, Conor O'Toole, 01 December 2013

Households tend to smooth their consumption and that’s why expenditures do not display a large variability over time. However, the recent financial crisis has been associated with a large decrease in consumption in certain countries. This column presents evidence that a drop in income during a crisis leads to a lower short-run consumption. Furthermore, micro data analysis shows that some households are affected more than others. Thus, policy recommendations can be made only after taking household heterogeneity into account.

Carlos Álvarez-Nogal, Christophe Chamley, 21 October 2013

The recent showdown over the US debt ceiling can be thought of as a game of chicken over the repayment of sovereign debt, with potentially severe consequences. This column describes an analogous historical episode in Spain, in which city delegates in the Cortes resisted tax increases, and Phillip II responded by suspending payments on a portion of the sovereign debt. By the time the cities caved to a doubling of their tax contribution two years later, the resulting bank failures and credit freeze had caused lasting economic damage.

Òscar Jordà, Moritz Schularick, Alan M. Taylor, 18 October 2013

In the aftermath of the global financial crisis, few would dispute the risks of excessive borrowing. But which debts should one worry about – public or private? This column presents new research on the interplay of public and private debts since 1870 in 17 advanced economies. History demonstrates that excessive private-sector borrowing plays a greater role than fiscal profligacy in generating financial instability. However, when the credit boom collapses, the government’s capacity to alleviate the downturn is limited by the prevailing level of public debt.

Peter Gal, Gabor Pinter, 21 September 2013

Renting capital goods makes up 20% of total capital expenses by US companies and this type of capital spending increases in downturns. This column discusses research showing that the systematic pattern of corporate leasing can be linked to credit constraints. This means that a robust rental sector has the potential to mitigate the negative effects of financial disruptions when obtaining credit becomes difficult.

Nicolas Berman, José De Sousa, Philippe Martin, Thierry Mayer, 20 October 2012

With the Global Crisis came the Great Trade Collapse, a fall in world trade much larger than the fall in GDP. This column argues that one reason behind this is that time to ship magnifies the effect of financial crises on trade. The reason is that exporters react to the increased probability of default even more so the longer the time to ship.

Moritz Schularick, Alan M. Taylor, 24 October 2012

Is the sluggish growth we see in the North Atlantic economies normal? This column updates the authors’ 5 October 2012 column to include an analysis of the UK. The original column looks at 14 advanced economies over the past 140 years and shows that larger credit booms during expansions have been systematically associated with more severe and prolonged slumps. Measured against the historical benchmark, the recent US recovery has been far better than could have been expected. The same cannot be said of the UK’s growth performance.

Martin Flodén, 25 September 2012

As is well known among economists, Sweden had its own financial crisis in the early 1990s and their public finances were quickly consolidated. This column asks whether the Swedish policy measures serve as a role model for how to handle the current crisis?

Luc Laeven, Fabian Valencia, 09 July 2012

Do advanced economies have an edge in resolving financial crises? This column shows that the record thus far supports the opposite view, with the average crisis lasting about twice as long as in developing and emerging market economies. It argues that macroeconomic stabilisation policies in advanced countries often delay the necessary financial restructuring.

Joshua Aizenman, 05 June 2012

The Eurozone crisis poses the single greatest downside risk to the global economic outlook. Were the founders of the euro hopelessly optimistic? This column argues that such crises present an opportunity for institutions to be put in place that prevent short-sightedness and increase the stability of the monetary union.

Pierre-Olivier Gourinchas, Maurice Obstfeld, 21 July 2015

What explains the different effects of the crisis around the world? This column compares the 2007–09 crisis to earlier episodes of banking, currency, and sovereign debt distress and identifies domestic-credit booms and real currency appreciation as the most significant predictors of future crises, in both advanced and emerging economies. It argues these results could help policymakers determine the need for corrective action before crises hit.

Carmen Reinhart, 09 January 2012

Financial crises often unfold according to common patterns, but the post-2007 contraction is in fact different from other post-WWII crises in its unusual severity, says Carmen Reinhart in CEPR DP8742. But the patterns of past crises may still provide clues on the future of housing, labour, and international financial markets. This paper outlines what that future might look like.


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