It also suggests simple explanations for a number of observed effects of financial globalization that conventional models have had a hard time explaining. 3 Despite its simplicity, this framework turns out to be a rich source of testable hypotheses linking the success or failure of financial globalization to observable country characteristics, such as initial income, savings, the level of productivity, the quality of enforcement institutions, and luck. Indeed, the main contribution of this article is to develop a framework to study how the interplay between the mix of creditors and the probability of financial crises is affected by financial globalization. What makes the analysis interesting is that the mix of creditors depends not only on the extent of financial globalization but also on the probability of financial crises itself. As a result, financial globalization raises the probability of financial crises. If instead the share of domestic debtholders drops sufficiently, governments stop taking those actions. Since governments typically care more about the welfare of domestic debtholders, if their share remains high enough, governments continue taking actions that result in a low probability of financial crises. The third observation is that financial globalization changes the mix of creditors, raising the number of foreign holders of domestic debts. Finally, courts often abide by equal treatment rules that limit the possibility of discrimination based on nationality. 2 Even when trade is intermediated by banks and other financial institutions, discrimination is difficult because it is usually not possible to know the nationality of the clients of these intermediaries or how default losses would be distributed among them. In the case of bonds and stocks, discriminating against foreigners is difficult because they can resell these assets to domestic residents in secondary markets. The second observation is that governments cannot fully discriminate between domestic and foreign residents when undertaking these actions. Or they can raise this probability by suspending bank payments, redenominating the terms or currency of existing financial contracts, and/or imposing capital controls. For instance, they can lower it by insuring deposits or bailing out financial institutions. Governments can take actions that affect this probability. The first is that the probability of financial crises depends on the nature of financial regulations and the judicial system’s ability and resolve to enforce contracts. This view is based on three observations. In particular, we explore the view that the increased instability of domestic financial markets can be partly explained by a change in government behavior resulting from financial globalization. The goal of this article is to improve our understanding of this relationship and its implications. The index of capital mobility is the subjective index from Obstfeld and Taylor (2004). (2001), Obstfeld and Taylor (2004), and Caprio et al. Sources: Reinhart and Rogoff (2009), who combine own data with Kaminsky and Reinhart (1999), Bordo et al. Capital Mobility and Incidence of Banking Crises
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |