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Corporate Finance and Financial Crises

Опубликовано на портале: 25-01-2003
Год: Spring 2000
Язык: Английский
Тематические разделы: Экономика, Финансовая экономика

Aннотация:
This course describes Corporate Finance and Financial Crises.
Section 2 considers models of twin crises and herefore starts with a fundamental based analysis, or in the terminology of the previous section, a business cycle view of banking crises and currency crises that extends the banking crisis model of Allen and Gale (1998). Section 3 develops models that were developed to explain pure currency crises of the type that were observed in the period 1945-1971 and subsequently where government policy is inconsistent with a fixed exchange rate. There are two generations of currency crisis model



Section 1 Introduction
Section 2 Historical and Recent Crises
What happened in East Asia in 1997?
After years of growth, the worlds most successful postwar economies had severe crises in which stock markets and currencies plummeted.
How can these crises be understood?
Conventional wisdom in media and among many government officials
Crises are due to basic inadequacies in the financial structure
Crony capitalism
Inadequate corporate governance
Lack of transparency due to inadequate disclosure and accounting systems, etc.
Poor regulatory supervision
Government guarantees
Guarantees by international organizations
BUT
Why didnt it happen before?
Most of these factors have been present during the period these economies were successful
Crises are not a new phenomenon. They have been around for centuries.
How do the East Asian crises relate to other crises?
Were the factors present there also present in previous crises?
Section 3 Banking Crises
As we saw last time a wide range of different theories have been suggested to explain crises. These are not necessarily mutually exclusive.
1.Financial panic (multiple equilibria)
2.Business cycle (essential crises)
3.Inconsistent government macroeconomic policies
4.Bubble collapse
5.Amplification theories (fragility and contagion)
6.Government guarantee models
Section 4 Currency Crises
During the period 1945-1971
Banking crises were virtually eliminated.
Currency crises did occur when government economic policies were inconsistent with fixed exchange rates.
Both before and after 1945-1971, banking crises have been common. Both types of crisis often occur together.
The second generation currency crisis models such as Obstfeld (1996) incorporate a government objective with costs and benefits to maintaining a currency peg.
To maintain a peg it may be necessary to spend reserves and raise interest rates to high levels. This may have a very damaging effect in terms of low investment, corporate bankruptcy, falling asset prices, stress on financial intermediaries and unemployment.
At some point the costs will outweigh the perceived benefits and the peg will be abandoned.
The costs will depend on the number of speculators that join in the attack on the currency. This raises the possibility of multiple equilibria as the simple example above illustrated.
If speculators attack the costs outweigh the benefits and the peg is abandoned.
If speculators dont attack the costs are lower than the benefits and the peg survives.
The critical issue is then what determines which equilibrium occurs. Sunspots provide one answer. Morris and Shins(1998) contribution was to show that lack of common knowledge could be used.
Section 5 Bubbles and Crises
So far the realizations of returns that have driven the crises have been taken as exogenous, i.e. they are simply bad outcomes.
In practice it seems that there are many cases where the crisis is brought on by an asset price bubble. It is the bursting of the bubble that causes the crisis.
In his famous book Manias, Panics and Crashes Kindleberger recognizes that often such bubbles are driven by an expansion of money and credit
Section 6 Contagion and Financial Fragility
Section 7 Government, Bankruptcy and Crises
Brief Bibliography
Country Presentations:
Brazilian Crisis 1998-1999
Korea Presentation
Russia Presentation
Sweden Presentation
Turkey Presentation

BIBLIOGRAPFY
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