1

Diploma Macro Paper 2

Monetary Macroeconomics

Lecture 8

Origins of recent crises

Mark Hayes

Source: Reinhart, 2010, vox-eu

The Anatomy of a Financial CrisisFalling confidence in many financial institutions

Asset-price bust

Insolvency at some financial institutions

Credit crunch (banks reduce lending)

Recession (from falling aggregate demand)

Vicious circle (recession puts more pressure on asset prices and financial institutions)

Chart A MPC’s evaluation of GDP at the time of theMay Report, ONS data at that time and latest ONS data(a)

Sources: ONS and Bank calculations.

(a) Chained-volume measures. The fan chart depicts an estimated probability distribution for GDP over the past. It can be interpreted in the same way as the fan charts in Section 5.

5

Minsky’s balance sheets

Hedged

Debt can be repaid in full from cashflow

Speculative

Interest can be paid from cashflow but repayment of principal depends on sale of assets or refinance

Ponzi

Payment of interest depends on refinancing

6

The balance of payments =

current account balance Exports less imports of goods (trade balance,

NX in the model) + exports less imports of services + net cross-border investment income + net cross-border labour income

+ capital account (net sales of securities to non-residents less purchases from non-residents)

= official financing (e.g. forex reserves change)

7

National income identity

𝑁𝑋=−𝑆𝐹=𝑆𝐺+𝑆𝑃− 𝐼

𝐼=𝑆𝐺+𝑆𝑃+𝑆𝐹

∆ 𝐼=∆𝑆𝐹

−∆𝑆𝑃=∆𝑆𝐹

−∆𝑆𝐺=∆𝑆𝐹

Relative Unit Labour Cost/ international competitiveness

70

80

90

100

110

120

130

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: OECD, Economic Outlook, 2013

1998 =

100 France

Germany

Greece

Italy

Spain

United Kingdom

Source: Eurostat, 2011

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Further reading

Kindleberger, Charles P. (1989, 2/e) Manias, Panics and Crashes, Basingstoke: Macmillan

Minsky, Hyman P. (1986) Stabilizing An Unstable Economy, New York: McGraw Hill

Cesaratto, Sergio (2013) The implications of TARGET2 in the European balance of payments crisis and beyond, European Journal of Economics and Economic Policies: Intervention, Vol. 10 No. 3, pp. 359–382