PRINCETON UNIVERSITY

Economics Department

Bendheim Center for Finance

 

Financial Crises

ECO 575 (Part II)

 

Franklin Allen

Spring Semester 2003

 

Introduction

 

Classes will be held on Mondays 1:30-4:20pm in 103 Bendheim Center for Finance. Office Hours are 2-4pm on Tuesdays and Thursdays (but not March 27 or April 3) and by appointment.

 

Contact details for Franklin Allen:  I can be reached at any time through e-mail:  hallen@princeton.edu   Most weeks I will be in my office 102 Bendheim Center for Finance on Mondays, Tuesdays and Thursdays.  My telephone number in the office is 609 258 0372.

 

Grading will be done on the basis of a paper.

 

 

Outline of Classes

 

March 24                        Section 1          Introduction

                                       Section 2          Historical and Recent Crises

                                       Section 3          Banking Crises

 

March 31                        Class cancelled - rescheduled to Friday, April 18 2:30-5:20pm

 

April 7                             Section 3          Banking Crises (continued)

 

April 14                           Section 4         Currency Crises

 

April 18                           Section 5          Bubbles and Crises

 (Friday 2:30-5:20pm)

 

April 21                            Section 6          Contagion and Financial Fragility

 

April 28                           Section 7           Government Policies and Crises

                                        Section 8           Conclusions           

 

 

Brief Bibliography

    The lectures will be based on a book that Douglas Gale and I are writing Understanding Financial Crises (UFC) to be published by Oxford University Press.

Section 1: Introduction

 

Slides: SEC1.pdf

 

UFC Text:  UFC-Chap01.pdf

 

Section 2:  Historical and Recent Crises

 

Slides: SEC2.pdf

 

Country Examples:

 

Brazilian Crisis 1998-1999.ppt

 

Korea Presentation.doc

 

Russia Presentation.doc

 

Sweden Presentation.doc  Paper on Swedish Crisis:  Sweden crisis.pdf

 

Turkey Presentation.doc

 

Bordo, M. (1986).  “Financial Crises, Banking Crises, Stock Market Crashes and the Money Supply: Some International Evidence, 1870-1933,” in Financial Crises and the World Banking System edited by Forrest Capie and Geoffrey E. Wood, New York: St. Martin's Press, 1986, pages 190-248.  Bordo86.pdf

 

Bordo, M. and B. Eichengreen (2000).  “Is the Crisis Problem Growing More Severe?” working paper, Rutgers University (On the Riksbank (Swedish Central Bank) website www.riksbank.com under Research, Conferences and the conference on Asset Prices and Monetary Policy held on June 16-17, 2000).

 

Bordo, M., B. Eichengreen, D. Klingeiel and M. Martinez-Peria (2000).  “Is the Crisis Problem Growing More Severe?” working paper, University of California, Berkeley.  Updated version of previous paper.  http://socrates.berkeley.edu/~pifa/papers.html - this link also allows you to download the figures: scroll down the page until you reach the link to the paper and figures -see also http://www.haas.berkeley.edu/~arose/BEKSc.pdf

 

Kindleberger, C. (1991).  Chapter 15 on Financial Crises in A Financial History of Western Europe (second edition), New York: Oxford University Press. KindlebergerCh15.pdf

 

Wilson, J., R. Sylla and C. Jones (1990).  “Financial Market Panics and Volatility in the Long Run, 1830-1988” in Crashes and Panics edited by E. White, Illinois: Dow-Jones Irwin, 85-125.  Wilson-Sylla-Jones.pdf

 

 

Section 3:  Banking Crises

 

Slides:  SEC3.pdf

 

Allen, F. and D. Gale. “Optimal Financial Crises,” Journal of Finance 53, 1245-1284.  Allen-Gale98.pdf

 

Allen, F. and S. Morris (2001).  “Finance Applications of Game Theory,” in Advances in Business Applications of Game Theory edited by K. Chatterjee and W. Samuelson, Kluwer Academic Publishers, Boston, 2001, 17-48. Allen-Morris-01.pdf

 

Diamond, D. W. and P. Dybvig (1983).  “Bank Runs, Deposit Insurance, and Liquidity,” Journal of Political Economy 91, 401-419.  Diamond-Dybvig83.pdf

 

Gorton, G. (1988).  “Banking Panics and Business Cycles,” Oxford Economic Papers 40, 751-781.  Gorton88.pdf

 

Hellwig, C. (2001).  “Public Information, Private Information and the Multiplicity of Equilibria in Coordination Games,” working paper, London School of Economics, forthcoming in Journal of Economic Theory.

 

Jacklin, C. (1987). “Demand Deposits, Trading Restrictions, and Risk Sharing,” in E. Prescott and N. Wallace, eds., Contractual Arrangements for Intertemporal Trade, University of Minnesota Press, Minneapolis, MN.  Jacklin87.pdf

 

Kaminsky, G. and S. Schmukler (1999).  “What Triggers Market Jitters?  A Chronicle of the Asian Crisis,” working paper, George Washington University, forthcoming Journal of International Money and Finance. http://gwu.edu/~graciela/HOME-PAGE/RESEARCH-WORK/WORKING-PAPERS/jitters.PDF

 

Kindleberger, C. P. (1978).  Manias, Panics, and Crashes: A History of Financial Crises, New York: Basic Books.

           

Mitchell, W. C. (1941).  Business Cycles and Their Causes, Berkeley: University of California Press.

 

Morris, S. and H. Shin (1998). “Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks,” American Economic Review 88, 587-597.  Morris-Shin98.pdf

 

 

Section 4:  Currency Crises

 

Slides: SEC4.pdf

           

Allen, F. and D. Gale (2000).  “Optimal Currency Crises,” Carnegie-Rochester Series on Public Policy, 53, 177-230.  Allen-Gale00.pdf

           

Chang, R. and A. Velasco (2000a). “Financial Fragility and the Exchange Rate Regime,” Journal of Economic Theory 92, 1-34.

 

Chang, R. and A. Velasco (2000b). “Financial Crises in Emerging Markets: A Canonical Model,” working paper, New York University.

           

Chari, V. and P. Kehoe, (1999). Asking the Right Questions About the IMF, Federal Reserve Bank of Minneapolis, 1998 Annual Report, Volume 13, May 1999.

           

Feldstein, M. (1998). “Refocusing the IMF,” Foreign Affairs 77 (March/April), 20-33.

           

Fischer, S. (1999). “On the Need for an International Lender of Last Resort,” working paper, International Monetary Fund.

 

Flood, R. and N. Marion (1998).  “Perspectives on the Recent Currency Crisis Literature,” NBER Working Paper 6380.  http://www.nber.org/papers/w6380

 

Friedman, M. (1998). “Markets to the Rescue,” The Wall Street Journal, October 13.

 

Gorton, G. (1988). “Banking Panics and Business Cycles,” Oxford Economic Papers 40, 751-781.

 

Hellwig, C. (2001).  “Public Information, Private Information and the Multiplicity of Equilibria in Coordination Games,” working paper, London School of Economics, forthcoming in Journal of Economic Theory. Hellwig01.pdf


Kaminsky, G. and C. Reinhart (1999). “The Twin Crises: The Causes of Banking and Balance-of-Payments Problems,” American Economic Review 89, 473-500. 

           

Krugman, P. (1979). “A Model of Balance-of-Payments Crises,” Journal of Money Credit and Banking 11, 311-325.

           

Krugman, P. (1998). “The Indispensable IMF,” The New York Times, May 15.

           

Morris, S. and H. Shin (1998). “Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks,” American Economic Review 88, 587-597. Morris-Shin98.pdf

           

Obstfeld, M. (1994).  “The Logic of Currency Crises,” Cahiers Economiques et Monetaires, Bank of France 43, 189-213.

 

Obstfeld, M. (1996).  “Models of Currency Crises with Self-fulfilling Features,” European Economic Review 40, 1037-1047.

           

Sachs, J. (1995). “Do We Need an International Lender of Last Resort?'' Lecture delivered at Princeton University, Princeton, N.J., April 20.

           

Schwartz, A. (1998). “Time to Terminate the ESF and IMF,” working paper, New York University.

 

Salant, S. and D. Henderson (1978).  “Market Anticipations of Government Policies and the Price of Gold,” Journal of Political Economy 86, 627-648.

 

 

Section 5:  Bubbles and Crises

 

Slides: SEC5.pdf

         

          Japan Bubble Economy.doc

          Japan Bubble Economy Data.xls

         Japan Bubble Nikkei 225.pdf

 

Allen, F. and D. Gale (1999).  “Bubbles, Crises and Policy,” Oxford Review of Economic Policy, 15, 9-18. http://finance.wharton.upenn.edu/~allenf/download/Vita/bubbles.pdf

 

Allen, F. and D. Gale (2000).  “Bubbles and Crises,” Economic Journal 110, 236-255. http://finance.wharton.upenn.edu/~allenf/download/Vita/bubble2.pdf

 

Allen, F. and Gorton, G. (1993). “Churning Bubbles,” Review of Economic Studies 60, 813-836.http://finance.wharton.upenn.edu/~allenf/download/Vita/churning.pdf

 

Higgins, M. and Osler, C. (1997). “Asset Market Hangovers and Economic Growth: The OECD During 1984-93,” Oxford Review of Economic Policy 13, 110-134.

 

Holmstrom, B. and Tirole, J. (1997). “Financial Intermediation, Loanable Funds, and the Real Sector,” Quarterly Journal of Economics, 112, 663-691.

           

Kaminsky, G. and Reinhart, C. (1996). “Banking and Balance-of-Payments Crises: Models and Evidence,” Working paper, Board of Governors of the Federal Reserve, Washington, D.C.

           

Kaminsky, G. and C. Reinhart (1999). “The Twin Crises: The Causes of Banking and Balance-of-Payments Problems,” American Economic Review 89, 473-500.

 

Kindleberger, C., (1978).  Manias, Panics, and Crashes: A History of Financial Crises, Basic Books, New York, NY.

 

 

Section 6:  Contagion and Financial Fragility

 

Slides:  SEC6part1.doc

 

Allen, F. and D. Gale (2000).  “Financial Contagion,” Journal of Political Economy 108, 1-33.  http://finance.wharton.upenn.edu/~allenf/download/Vita/contagion.pdf

 

Allen, F. and D. Gale (2001).  “Financial Fragility”, Wharton Financial Institutions Center Working Paper 01-37.  http://fic.wharton.upenn.edu/fic/papers/01/0137.pdf

 

Calvo, G. (1999).  “Contagion in Emerging Markets: When Wall Street is a Carrier,” Unpublished manuscript, University of Maryland.

 

Chari, V. and P. Kehoe (2000).  “Financial Crises as Herds,” working paper, Federal Reserve Bank of Minneapolis.

 

Freixas, X. and B. Parigi (1998).  “Contagion and Efficiency in Gross and Net Interbank Payment Systems,” Journal of Financial Intermediation 7, 3-31.

           

Freixas, X. and B. Parigi and J. Rochet (2000). “Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank,” Journal of Money, Credit and Banking 32, 611-38.

           

King, M. and S. Wadhwani (1990). “Transmission of Volatility Between Stock Markets,” Review of Financial Studies 3, 5-33.

 

Kiyotaki, N. and J. Moore (1998). “Credit Chains,” working paper, London School of Economics, Department of Economics.

 

Kodres L. and M. Pritsker (2000), “A Rational Expectations Model of Financial Contagion,” working paper, International Monetary Fund.

 

Krugman, P. (1998), “Bubble, Boom, Crash: Theoretical Notes on Asia's Crisis,” working paper, MIT, Cambridge, Massachussetts.

 

Kyle, A. and W. Xiong (1999).  “Contagion as a Wealth Effect of Financial Intermediaries,” working paper, Duke University, Durham, N.C.

 

Lagunoff, R. and S. Schreft (1998).  “A Model of Financial Fragility,” forthcoming, Journal of Economic Theory.

 

McKinnon, R. and Pill, H. (1997), “Credible Economic Liberalizations and Overborrowing,” American Economic Review 87, 189-203.

 

Rochet, J. and J. Tirole (1996a). “Interbank Lending and Systemic Risk,” Journal of Money, Credit and Banking 28, 733-762.

 

Rochet, J. and J. Tirole (1996b). “Controlling Risk in Payment Systems,” Journal of Money, Credit and Banking 28, 832-862.

 

Yuan, K. (2000). “Asymmetric Price Movements and Borrowing Constraints:  A Rational Expectations Equilibrium Model of Crisis, Contagion, and Confusion,”  working paper, Department of Economics, MIT.

 

 

Section 7:  Government, Bankruptcy and Crises

 

Allen, F. and R. Herring (2001).  “Banking Regulation versus Securities Market Regulation,” Wharton Financial Institutions Center Working Paper 01-29.

 

Krugman, P. (1998), “Bubble, Boom, Crash: Theoretical Notes on Asia's Crisis,” working paper, MIT, Cambridge, Massachussetts.

 

McKinnon, R. and Pill, H. (1997), “Credible Economic Liberalizations and Overborrowing,” American Economic Review 87, 189-203.