FINANCIAL GLOBALIZATION AND CRISES
Luis Servén (World Bank)

Objectives

Bubbles and crashes are hardly new phenomena in market economies, but their causes and propagation mechanisms have been brought under the spotlight by the recurrent emerging market crises of the last two decades and, especially, the global crisis that started in 2008. These events raise new questions about the costs and benefits of global financial integration, the contribution of capital flows and financial innovation to macroeconomic fragility, and the mechanisms behind the international propagation of turbulence.

This course reviews recent analytical and empirical contributions that aim to understand the incidence and effects of bubbles and crises, their propagation channels, and the macroeconomic policies to limit macro-financial vulnerability in a world of deepening international financial integration.

Intended for

Economists, researchers, and university professors interested in open economy macroeconomics and macroeconomic policies.

Prerequisites

Macroeconomics and finance at an advanced undergraduate level. Analytical treatment will be at the level of Foundations of International Macroeconomics by Maurice Obstfeld and Kenneth Rogoff (1996, The MIT Press).

Topics

Global imbalances. Where did they come from? Equilibrium and disequilibrium views. ‘Uphill’ capital flows and the allocation puzzle. Self-insurance and ‘new mercantilism’ in emerging markets. Resolving imbalances: real adjustment and financial adjustment.

Financial globalization and financial turbulence. The costs and benefits of globalization. Capital market imperfections, sovereign debt and default risk. Interdependence and contagion.

Bubbles. Varieties of bubbles: rational bubbles, beauty contests, behavioural investors.  Bubbles and capital flows. Fighting bubbles: old and new views.

Financial crises. Varieties of emerging-market crises. Strategic complementarities, self-fulfilling crises, balance sheet effects. The 2008 subprime crisis and its propagation. Challenges for macroeconomic and financial policies.