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Understanding Economic Crises: A Comprehensive Analysis of Bubbles and Financial Instability

This outline delves into the classifications and dynamics of various economic bubbles and crises, drawing insights from the works of Reinhart and Rogoff. It compares traditional theories with contemporary data and examples, emphasizing inflation crises, currency crashes, asset price fluctuations, and their broader macroeconomic implications. The analysis includes specific thresholds for different crises, historical data trends, and important case studies from various decades, exploring how past events inform current financial understanding.

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Understanding Economic Crises: A Comprehensive Analysis of Bubbles and Financial Instability

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Presentation Transcript

  1. Fin254f: Spring 2010 Reinhart/Rogoff (1) Types of Bubbles

  2. Outline • Book intro • Classifications • Some quick examples

  3. Defining Mission • Differences from Kindleberger/Aliber • Broader (international macro) perspective • More (lots of) data (charts) • Trying to move on from "narrative" approach

  4. Crises Types • Quantitative thresholds • Inflation crises • Currency crashes • Currency debasement • Asset price bubbles bursting • Events • Banking crises • External debt crises • Domestic debt crises

  5. Inflation Crises • 1 year inflation > 40 percent • These crises much more common in recent history • Average inflation • 1500-1799: 0.50% • 1800-1913: 0.71% • 1914-2006: 5.00%

  6. Currency Crises • Drop of 15% per year • No other variables • Good for post WWII

  7. Currency Debasement • Currency reissue/conversion • Issue new currency • Record (Zimbabwe 10 billion to 1) • Usually after asset pricing bubbles

  8. Bursting of Asset Bubbles • Important, but • Housing and asset prices more difficult to get long term

  9. Banking Crises • Dating difficult • Price of bank stocks? • Changes in deposits? • Asset or liability side? • Events • Bank runs -> closures • Large scale government assistance

  10. External Debt Crises • Default on government debt • Held outside country/foreign legal jurisdiction • Usually in foreign currency • Default date easy • Resolutions difficult

  11. Domestic Debt Crises • Debt issued by government inside country/domestic jurisdiction • Sometimes unnoticed

  12. This Time is Different: Examples • 1920’s • Stable politics/new technologies • Asia 1990’s • Conservative fiscal, stable fx rates, high growth • US 2000’s • Globalization, technology, great financial system, monetary policy, securitized debt

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