Impact of Banking Crises on Economies & Financial Markets: Amplification Mechanism, Dispense di Mercato Finanziario

Scarica Impact of Banking Crises on Economies & Financial Markets: Amplification Mechanism e più Dispense in PDF di Mercato Finanziario solo su Docsity! Banking crises and the amplification mechanism Banking crises and the amplification mechanism • Banking crises have long impacted rich and poor countries alike. • Financial crises, rarely occur in isolation, and often are major amplifiers of recessions. • This means that more often financial crises are not the trigger of a recession, but the amplification factor. • Banking crises are often accompanied by other kinds of crises. For this reason it’s very interesting to examine the coincidence and timing of crises. Banking crises and the amplification mechanism • A following work, published by Bernanke together with Mark Gertler in 1990 in «Quaterly Journal of Economics», showed that imperfections in the financial markets due to asymmetric information between lenders and borrowers can produce an amplification of financial shocks. • In the Bernanke-Gertler model, a reduction of wealth, has effect on production, because firms are forced to reduce their investments plans. • Firms are forced to reduce their investments plans because they should finance a larger share of their investments through banking lending as a consequence of falling earnings. • But external financing is more expensive than internal financing. • «Recession cause a loss in collateral that is amplified through the financial system» (Reinhart, Rogoff, 2009). Banking crises and the amplification mechanism • Another article, published by Kiyotaki and Moore in 1997 in Journal of Political Economy, showed that a collapse in land prices, can affect firm’s collateral, leading to a reduction of investments that causes a further reduction in land prices. • We can conclude that there is a wide literature on theoretical and empirical evidence that banking crises are major amplifiers of recessions. Banking crises and capital mobility • Theory has shown that there is the marked correlation between «freer capital mobility and the incidence of banking crises» (Reinhart and Rogoff, 2009). • «Periods of high international capital mobility have repeatedly produced international banking crises» (Reinhart and Rogoff, 2009), not only in recent years, but also historically.