Katharina Bergant, Francesco Grigoli, Niels-Jakob Hansen, Damiano Sandri, 12 August 2020

The vulnerability of emerging markets to global financial shocks leads to recurrent calls for policymakers to deploy additional policy tools besides relying on exchange rate flexibility. This column presents evidence that a more stringent level of macroprudential regulation can considerably dampen the effects of global financial shocks on economic activity in emerging markets. A possible channel through which macroprudential regulation enhances macroeconomic resilience is by allowing for a more countercyclical monetary policy response. The authors do not find evidence that capital flow restrictions provide similar benefits.

Fabiano Schivardi, Guido Romano, 18 July 2020

The COVID-19 crisis has induced a sharp drop in cash flow for many firms, possibly pushing solvent but illiquid firms into bankruptcy. This column presents a simple method to determine the number of firms that could become illiquid, and when. The authors apply this method to the population of Italian businesses and find that at the peak, around 200,000 companies (employing 3.3 million workers) could become illiquid due to a total liquidity shortfall of €72 billion euros. It is essential that policymakers shelter businesses by acting quickly, especially if there is a ‘second peak’ after the summer.

Simeon Djankov, Dorina Georgieva, Hibret Maemir, 03 July 2020

Countries reform when their neighbours have reformed too, especially in the aftermath of economic crises. This column examines business regulatory reforms during 2004–2019. Previous crisis episodes have generated improvements in the law and administration of registering property, trading across borders, protecting investors and resolving bankruptcy. The current period of post-COVID-19 recovery is propitious for regulatory reform.

Olivier Darmouni, Oliver Giesecke, Alexander Rodnyansky, 20 May 2020

The share of firms’ borrowing from bond markets has been rising globally. This column argues that euro area companies with more bond debt are disproportionately affected by surprise monetary shocks, compared to firms with mostly bank debt. This finding stands in contrast to the predictions of a standard bank lending channel and points toward frictions in bond financing. This provides lessons for the conduct of monetary policy in times of hardship such as COVID-19, when the corporate sector suffers from liquidity shortages.

Rui Esteves, Nathan Sussman, 18 April 2020

After an initial lull, financial markets reacted with a vengeance to the COVID-19 pandemic. Comparisons with 2008 are inevitable, but the ultimate impact on markets is still unclear. This column argues that the spread of the pandemic has little explanatory power over financial stress. Markets reacted as in any international financial crisis by penalising emerging economies (and countries without credible monetary anchors), exposing age-old vulnerabilities. This finding highlights the need for credible, but flexible, sovereign currencies and the need to build up liquidity reserves.

M. Ayhan Kose, Peter Nagle, Franziska Ohnsorge, Naotaka Sugawara, 16 March 2020

The global economy has experienced four waves of rapid debt accumulation in emerging and developing economies over the past 50 years. This column examines these waves of debt and puts the fourth (current) wave in historical context. The current wave of debt, which started in 2010, stands out for its exceptional size, speed, and breadth. While the previous three waves all ended with widespread financial crises, policymakers have a range of options to reduce the likelihood of the current debt wave ending in crisis.

Felipe Benguria, Alan M. Taylor, 03 March 2020

A perennial and fundamental macroeconomic question is whether financial crises are negative demand or supply shocks. This column discusses how the response of international trade flows and prices to financial crises can shed light on the debate. Evidence based on a new dataset of two centuries of financial crises and trade suggests financial crises are clearly negative shocks to demand.

Marzio Bassanin, Ester Faia, Valeria Patella, 30 August 2019

Macroeconomic models with credit frictions do a good job of explaining debt falls during financial crises, but fail to account for pre-crisis debt increases and level pro-cyclicality. This column introduces a model in which investors’ beliefs about future collateral values are non-linear. Greater ambiguity optimism during booms and greater aversion during recessions closely model the empirical shifts seen before and during financial crises, highlighting the joint role of financial frictions and beliefs distortions for market developments.

Jan Hannes Lang, Peter Welz, 11 March 2019

Financial crises are often preceded by credit excesses, but how do we know when credit is excessive? This column shows that deviations of household credit from levels that are justified by economic fundamentals exhibit long cycles of 15 to 25 years with large amplitudes of around 20%. Household credit excesses build up many years ahead of financial crises and only gradually unwind thereafter. Most importantly, higher levels of household credit imbalances are associated with larger declines in real GDP once a financial crisis hits. The findings suggest that household credit cycles should be carefully monitored by macroprudential policymakers to ensure financial stability.

Sanjiv Das, Kris Mitchener, Angela Vossmeyer, 11 March 2019

The Global Crisis brought attention to how connections among financial institutions may make systems more prone to crises. Turning to a major financial crisis from the past, this column uses data from the Great Depression to study risk in the commercial banking network leading up to the crisis and how the network structure influenced the outcomes. It demonstrates that when the distribution of risk is more concentrated at the top of the system, as it was in 1929, fragility and the propensity for risk to spread increases.

Peter Koudijs, Laura Salisbury, Gurpal Sran, 06 October 2018

In order to protect the financial system from excessive risk-taking, many argue that bank managers need to have more personal liability. However, whether the liability of bank managers has a significant effect on risk-taking is an open question. This column studies a unique historical episode in which similar bankers, operating in similar institutional and economic environments, faced different degrees of personal liability, depending on the timing of their marriages, and finds that limited liability induced bankers to take more risks.

Tim Jackson, Laurence Kotlikoff, 30 August 2018

Financial crises have historically been triggered by news of financial malfeasance. Some economists advocate greater opacity for bankers to ensure investors keep the faith. This column models bankers as including a share of malfeasants who steal or lose investors’ money. Within this framework, deposit insurance makes matters worse and private monitoring fails due to free riding. The optimal policy is identified as full financial disclosure, which weeds out crooked bankers. 

Jon Danielsson, Marcela Valenzuela, Ilknur Zer, 26 March 2018

Reliable indicators of future financial crises are important for policymakers and practitioners. While most indicators consider an observation of high volatility as a warning signal, this column argues that such an alarm comes too late, arriving only once a crisis is already under way. A better warning is provided by low volatility, which is a reliable indication of an increased likelihood of a future crisis.

Stefan Avdjiev, Bilyana Bogdanova, Patrick Bolton, Wei Jiang, Anastasia Kartasheva, 22 December 2017

The promise of contingent convertible capital securities as a bail-in solution has been the subject of considerable theoretical analysis and debate, but little is known about their effects in practice. This column reviews the results of the first comprehensive empirical analysis of bank CoCo issues. Among other things, it finds that the propensity to issue a CoCo is higher for larger and better-capitalised banks, and that their issue result in statistically significant declines in issuers' CDS spreads, indicating that they generate risk-reduction benefits and lower the costs of debt.

Clemens Jobst, Helmut Stix, 29 November 2017

Many societies in the developed world have been shifting away from cash towards electronic alternatives. Despite this, there has been a remarkable increase in currency holdings over the past decade. This column looks at the evolution of cash holdings over time to shed light on this apparent contradiction. While circulating currency over GDP has been declining since WWII, there have been sizable increases in recent decades which are only partially explained by low interest rates.

Martin Ellison, Andrew Scott, 20 October 2017

A new dataset for the market value of British government debt makes a long-run analysis of fiscal sustainability and debt management possible. It shows that the 20th century saw a shift to financing debt by inflation and low bondholder returns, rather than through fiscal surpluses. This column uses a counterfactual analysis to show that long bonds have been an expensive way of financing debt, especially after a financial crisis. Had the government issued only three-year bonds since 1914, the level of debt in 2017 would have been lower by 28% of GDP.

Alan M. Taylor, 16 August 2017

Òscar Jordà, Björn Richter, Moritz Schularick, Alan M. Taylor, 07 April 2017

Higher capital ratios are unlikely to prevent a financial crisis. This is empirically true both for the entire history of advanced economies from 1870 to 2013 and for the post-WW2 period, and holds both within and between countries. The authors of this column reach this conclusion using newly collected data on the liability side of banks’ balance sheets in 17 countries.  However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital. 

Aida Caldera, Alain de Serres, Filippo Gori, Oliver Röhn, 28 March 2017

Severe recessions have been frequent among OECD countries over the past four decades. This column explores the implications of various broad types of policy to minimise the risk and frequency of such episodes for the trade-off for the growth-fragility nexus. Product and labour market policies improve growth but are essentially neutral with regards to economic risks, while better quality institutions increase both growth and economic stability. Macroprudential and financial market policies, on the other hand, entail a trade-off between growth and risk.

David Marques-Ibanez, Michiel van Leuvensteijn, 03 February 2017

An unprecedented process of deregulation took place in the banking sector in the three decades prior to the Global Crisis. This column argues that during periods of intense bank competition, financial innovation can compound the adverse effects of competition on stability. Coupled with strong competition, the significant use of one such innovation – securitisation – in the run-up to the crisis was related to high levels of bank risk.

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