Ambrogio Cesa-Bianchi, Fernando Eguren Martin and Gregory Thwaites.
Why do banking crises happen in “waves” across countries? Do global developments matter for domestic financial stability? Is there such a thing as a global cycle in domestic credit? In this post we link these ideas and show that foreign financial developments in general, and global credit growth in particular, are powerful predictors of domestic banking crises. Channels seem to be financial rather than related to trade, and these include transmission of market sentiment, cross-border portfolio flows and direct crisis contagion.
Real interest rates have fallen by around 5 percentage points since the 1980s. Many economists attribute this to “secular” trends such as a structural slowdown in global growth, changing demographics and a fall in the relative price of capital goods which will hold equilibrium rates low for a decade or more (Eggertsson et al., Summers, Rachel and Smith, and IMF). In this blog post, I argue this explanation is wrong because it’s at odds with pre-1980s experience. The 1980s were the anomaly (chart A). The decline in real rates over the 1990s and early 2000s simply reflected a return to historical norms from an unusually high starting point. Further falls since 2008 are far more plausibly related to the financial crisis than secular trends.
Ian Webb, David Baumslag and Rupert Read.
One September morning, the Lord Mayor of London was called to inspect a fire that had recently started in the City. Believing that it posed little threat, he refused to permit the demolition of nearby houses, probably due to the expense of compensating the owners. The fire spread and ultimately destroyed most of the city. The Great Fire of London had begun. Only when the fire became too extensive to be readily halted did the full extent of the danger become evident. Financial regulators today face a similar challenge preventing financial crises- action causes significant costs to some but the consequences of inaction are much more uncertain. To combat this, we argue they should apply the precautionary principle.