Category Archives: financial crisis

The Phylloxera Analogy: Lessons from Emerging Markets

Share Button

    
      In 2008, the global financial system was grievously infected by so-called toxic assets originating in the United States.  As a result of the crisis, many have asked what fundamental rethinking will be necessary to save macroeconomic theory.  Some answers may lie with models that have in the past been applied to fit the realities of emerging markets — models that are at home with the financial market imperfections that have now unexpectedly turned up in industrialized countries.  The imperfections include default risk, asymmetric information, incentive incompatibility, procyclicality of capital flows, procyclicality of fiscal policy, imperfect property rights, and other flawed institutions.   To be sure, many of these theories had been first constructed in the context of industrialized economies, but they had not become mainstream there.   Only in the context of less advanced economies were the imperfections undeniable.  There the models thrived.     
  read more

Share Button

Reserves and Other Early Warning Indicators Predict Crises After All

Share Button

With aftershocks of the recent global financial earthquake still being felt in some parts of the world, it would be useful to have a set of Early Warning Indicators to tell us what countries are most vulnerable.    Nobody should be surprised that it is hard to forecast crises with high reliability;    low-risk opportunities for profits are never easy to find.   Thus it is especially hard to predict the timing of a crisis.  Some economists, however, are skeptical that Early Warning Indicators (EWIs) have any useful predictive ability at all.  A common assessment is that EWIs have failed, in the sense that in each historical round of emerging market crises (1982, 1994-2001, 2008) those particular variables that appeared statistically significant in that round did not perform well in the subsequent round.   This is not the right conclusion. read more

Share Button

Limit Tax Expenditures

Share Button

The National Journal asks for views on a recent proposal from Len Burman .  I couldn’t agree more with the idea:  we need to limit tax expenditures.  
 
With regard to the politics, one would have to see whether the phrase “cut tax expenditures” polls more like the phrase “cut expenditures,” which I assume polls well, or like the phrase “raise taxes,” which of course polls horribly.  I have no idea.  But at least there is a hope of breaking through the mindless artificial “Taxes versus Spending” rhetoric that dominates Washington. read more

Share Button