Sequential Financial Crisis Scenario

Seminararbeit , 2009 , 7 Seiten , Note: 2,0

VWL - Finanzwissenschaft

Global imbalances in financial markets, especially the current account deficit in the US and the high foreign reserves in Asian countries, are considered to have influenced the housing bubble in the USA and other Western countries. This research proposal establishes a link between the twin crises in Asia starting in 1997 and the current need of central banks in this region to accumulate so called „hard currencies“ like the US Dollar and the Euro. In the following we focus on the theory of sudden stops and introduce a second
element that describes a run on the foreign reserves of the central bank. Firstly, agents in the economy run on domestic banks and change bank deposits into domestic currency. Secondly, they escape into hard currencies because they fear that exchange rate movements lower the real value of the domestic currency. This challenges foreign reserves of central banks, such that the central bank finally cannot provide any additional foreign reserves to the domestic banking system. To guarantee that foreign reserves are sufficient for all agents in the country central banks started building up large foreign reserves to self-insure against financial fragilities.

Inhaltsverzeichnis

• Global Imbalances in Financial Markets
• Increased Risk Sharing in Emerging Economies
• Theoretical Approach and Model
• Simple Model
• Conclusion and Policy Implications
• Appendix
• Literaturverzeichnis

Zielsetzung und Themenschwerpunkte

This research proposal aims to establish a link between the twin crises in Asia starting in 1997 and the current need of central banks in this region to accumulate so called ,,hard currencies" like the US Dollar and the Euro. The proposal focuses on the theory of sudden stops and introduces a second element that describes a run on the foreign reserves of the central bank.

• Sudden Stops and Financial Crises
• Foreign Reserves Accumulation
• Bank Runs and Currency Depreciation
• Lender of Last Resort and Liquidity Shortages
• Risk Sharing and Global Risk Aversion

Zusammenfassung der Kapitel

The first chapter discusses the growing global imbalances in international financial markets, particularly the current account deficit in the United States and the accumulation of foreign reserves by central banks in emerging countries. It explores various explanations for this phenomenon, including managed exchange rate regimes, sovereign wealth funds, and the need for self-insurance against sudden stops.

The second chapter focuses on the increasing risk sharing in emerging economies as a response to the financial crises in 1997. It describes the mechanism of sudden stops, where foreign investors withdraw capital from emerging countries due to perceived risk, leading to currency depreciation and bank runs. The chapter highlights the role of central banks in building up foreign reserves to mitigate these risks.

The third chapter introduces a theoretical model to analyze the behavior of firms during sudden stops. It examines how firms respond to negative shocks to investor expectations, leading to a run on the central bank for foreign currency. The model demonstrates the potential for liquidity shortages in foreign reserves and the endogenous adjustment process of the exchange rate.

The fourth chapter presents a simple model that explores the firm's decision to continue production or close down and default. The model highlights the role of expectations about future exchange rate developments and the impact of insolvency on foreign investor risk perception.

The fifth chapter concludes the research proposal by summarizing the key findings and policy implications. It emphasizes the importance of central banks maintaining sufficient foreign reserves to prevent liquidity shortages and mitigate the impact of sudden stops on emerging economies.

Schlüsselwörter

The key words and focus themes of the text include sudden stops, financial crises, global imbalances, lender of last resort, foreign reserves, bank runs, currency depreciation, risk sharing, and emerging economies. The research proposal explores the relationship between these concepts and their implications for financial stability in emerging markets.

• Hochschule: European University Institute
• Note: 2,0
• Autor: Moritz Meyer (Autor:in)
• Erscheinungsjahr: 2009
• Seiten: 7
• Katalognummer: V182527
• ISBN (eBook): 9783656062028
• Sprache: Englisch
• Schlagworte: Financial Crisis, Asia, Capital flows