Causes and Consequences - Auburn Universityhzk0001/GlobalFinancialCrisis_HKim_Oct2010.pdf · Causes...
Transcript of Causes and Consequences - Auburn Universityhzk0001/GlobalFinancialCrisis_HKim_Oct2010.pdf · Causes...
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GLOBAL FINANCIAL CRISIS:
Causes and Consequences
Hyeongwoo Kim
Auburn University
October 30, 2010
Prepared for the 4th KSEA-AL Symposium on Automotive Technology
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US Financial CrisisUS Financial Crisis
� The collapse of the
US sub-prime
mortgage market in
2007 triggered a global 2007 triggered a global
financial crisis.
� The failure of Lehman Brothers resulted in a serious
disruption in international financial markets.� Stock prices (level, sd)
� Exchange rates (level, sd)
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Global RecessionsGlobal Recessions
� This US financial crisis triggered recessions not only in
the US but also in the rest of the world.Real GDP growth rates ↓ (Fig)� Real GDP growth rates ↓ (Fig)
� Unemployment rates ↑ (Fig)� Still very high in the US (Unemployment durations ↑)
� Inflation rates ↓ (recessions) after initial increases
(expansionary M policies) (Fig)
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� Policy makers tried to stop it, but less
successful� Expansionary monetary policies
� Interest rate cuts (short, long)
� Quantitative easing (US)
Policy ResponsesPolicy Responses
� Quantitative easing (US)
� Expansionary fiscal policies� Stimulus checks
� Cash for clunkers
� Government spending vs. tax cuts
� Private sectors did not respond as expected� Consumption (Fig) and Investment (Fig) barely
responded.
� International trade shrank (Fig).
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Causes and ConsequencesCauses and Consequences
� The profession seems to agree on that the
crisis was triggered by the collapse of the US
sub-prime mortgage market. Then, natural
questions are,
� Why did it collapse?
� The value of the US sub-prime mortgage market
is tiny (6.7% of total mortgage debt in 2009).
Why did it spread to,
� Other financial industries?
� Other non-financial industries?
� Other countries?
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Causes of the CrisisCauses of the Crisis
� Why did it collapse?
� Housing price bubble
� Unsustainable (Fig)
� Bubble is supposed to burst.
� Some blame Greenspan – unclear (Fig)� Some blame Greenspan – unclear (Fig)
� Overall asset bubbles around 2000
(Fig)
� Securitization (financial
innovations, loophole mining)
� Excessive leverage (off-balance
sheet activities)
� Moral hazard (too big to fail)
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Other Financial SectorsOther Financial Sectors
� Financial activities are highly intertwined.
� The Glass-Steagall Act (Banking Act of 1933) were repealed,
� Depository Institutions Deregulation and Monetary Control Act of
1980 (Regulation Q)
� The Gramm–Leach–Bliley Act (November 12, 1999; Bank-holding � The Gramm–Leach–Bliley Act (November 12, 1999; Bank-holding
company)
� Virtually no separation of banking from securities industry now
� Update: President Obama signed the Dodd-Frank financial regulation
reform bill (July 21, 2010).
� The collapse of the sub-prime mortgage market quickly
spread to other financial industries.
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NonNon--Financial Real SectorsFinancial Real Sectors
� Spill-over effects to non-financial
industries
� Caused by liquidity crunchCaused by liquidity crunch
� Excess reserves ↑ (Fig)
� Money multiplier ↓ (Fig)
� Higher borrowing costs due to high
degree uncertainty
� Risk premium ↑ (Fig)
� Credit default swap ↑
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Contagion to Other CountriesContagion to Other Countries
� Financial markets are highly integrated across countries
(Financial channel)
� De-regulation (can be costly, Korea vs. China in 1997)
� Shares of foreign investors
� Mrs. Watanabe (Fig)
� Substantial increases in volumes of international trade
(Real activities channel) (Fig)
� Supposed to be good (comparative advantage)
� May become vulnerable to foreign shocks
� Exchange rate shocks (highly volatile and persistent)
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Contagion to Other CountriesContagion to Other Countries
� Highly integrated international economies may imply,
� Higher degree co-movement in 2000s
� Coupling phenomenon
� Static synchronization (Fig)
� Temporary dynamic correlations (Fig)� Temporary dynamic correlations (Fig)
� Severer and more persistent adverse effects of a foreign
shock in 2000s.
� Dynamic synchronization (Fig)
� 1% ↓ in the US stock price � 0.5% and 2% ↓ in German stock
prices in the 1970s and in the 2000s, respectively, in the long-run.
� More Significant adverse effects in the 2000s both quantitatively and
qualitatively
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Policy ImplicationsPolicy Implications
� Kim and Kim (2010a,
2010b) studied the recent
US financial crisis and
identified the channels of
contagion in international contagion in international
financial markets.
� Contagion occurred
abruptly and lasted for a
short period of time.
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Policy ImplicationsPolicy Implications
� Kim and Kim (2010a,
2010b) studied the recent
US financial crisis and
identified the channels of
contagion in international contagion in international
financial markets.
� Substantial level effect
� Stock prices (level)
� Exchange rates (level)
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Policy ImplicationsPolicy Implications
� Kim and Kim (2010a,
2010b) studied the recent
US financial crisis and
identified the channels of
contagion in international contagion in international
financial markets.
� EWS, Currency Swap
Agreements
� Strengthen the roles of
domestic agents in
financial markets
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Thank you.Thank you.Thank you.Thank you.
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Stock Prices
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Stock Returns Volatility
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Foreign Exchange Rates
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FX Depreciation Rates Volatility
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Real GDP Growth Rates
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Unemployment Rates
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CPI-based Inflation Rates
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Overnight Inter-bank Rates
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10-Year Government Bond Yields
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Real Consumption Growth
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Real Investment Growth
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Exports-Imports Growth
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US Money Growth
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Housing Price and Fundamentals
500
600
700
800
900
1000
150
200
250
Po
pu
lati
on
in
Mil
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ns
Ind
ex o
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tere
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ate
Home Prices
0
100
200
300
400
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1880 1900 1920 1940 1960 1980 2000 2020
Po
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Year
Home Prices
Building CostsPopulation
Interest Rates
Source: Irrational Exuberance (2nd Edition), Robert J. Shiller
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Interest Rates
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Commodity Prices
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Risk Premium
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US Trade Openness
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Mrs. Watanabe
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Excess Reserves
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Money Multiplier
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Stock Market Synchronization
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BEKK Conditional Correlations
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Impulse-Response Analysis