Embargo:
00.01, Friday 6 April 2001
Financial
crises in the 1990s were enormously disruptive,
producing massive capital losses and deep recessions, roiling
financial markets worldwide, overturning
governments and forcing a re-think of the international financial
system. Yet, despite their importance, we do not really understand
them. Certainly, we know much about individual crises – writings on
the Asian crisis, for example, would fill a small truck – but each
new crisis seems to be unique, requiring a brand new analytic
framework and leading to a new set of policy prescriptions.
To
shed a new light on this difficult, pressing problem, Michael
Bordo, Barry Eichengreen, Daniela Klingebiel and Maria Soledad
Martinez-Peria look at financial crises from a very long historical
perspective. Using their enormous new data set covering 120 years of
financial crises, they compare the modern period (1973-1998), with the
Bretton Woods period (1945-1971), the interwar years (1919-1939), and
the gold standard era (1880-1913), considering both frequency and
severity of three types of crises – currency crises, banking crises
and ‘twin’ crises (a currency crisis plus a banking crisis). The
results are fascinating.
In
the last quarter of the 20th century, crises have become
more frequent and more severe compared to the historical norm, but the
increased severity is due to the recent ‘mix’ of crises
(individual crises have not become worse in themselves, but the
heightened frequency of twin crises – by far the most disruptive
type – has made the average crisis in recent years very bad indeed).
In short, the popular view that we live in a new and troubling
financial era is correct, however, the equally popular association
between crises and globalisation is not borne out. During the first
wave of globalisation (1880-1913), crises were relatively infrequent,
so we see that rapid-fire crises are not
an inevitable corollary of globalisation and unfettered capital flows.
The
authors also use their data to address the role of policy such as
capital controls and exchange rate regimes. The authors find that
capital account liberalisation reduces the frequency of currency
crises, but boosts that of banking crises. Fixed exchange rates and
big current account deficits tend to worsen crises when they come. And
capital account liberalisation, the authors
opine, ‘should be accompanied by measures to solidify prudential
financial supervision and disclosure rules while giving financial
institutions and market-participants durable incentives to consider
the consequences of their actions’.
Please describe this
as a ‘journal published by Blackwell Publishers for CEPR, CES and
DELTA in association with the European Economic Association’
Notes
for Editors:
Economic
Policy is published in Association with the European Economic
Association by the Centre for Economic Policy Research, the Center for
Economic Studies of the University of Munich and the Département et
Laboratoire d’Economie Théorique et Appliquée (DELTA), in
collaboration with the Maison des Sciences de l’Homme.
For
further information about this publication please contact Rita
Gilbert, Tel: (44 20) 7878 2917 / Mobile: 07941 196 806
or email: rgilbert@cepr.org.
The
Authors:
Michael
Bordo is
Professor of Economics at Rutgers University, New Jersey.
Barry Eichengreen is Professor of Economics at the University of
California, Berkeley. Daniela Klingebiel and Maria
Soledad Martinez-Peria are at the World Bank.
Economic
Policy
Issue 32
Including
Jeremy
Edwards and Marcus Nibler
Corporate Governance in Germany: the Role of Banks and Ownership
Concentration
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