Economics 8774
Financial Crises and Reform in the Developing Countries
Spring 2004
SYLLABUS
COURSE OBJECTIVES
This course will introduce students to the major issues of financial crises
and reform in developing countries. Some of the basic tools of open economy
macroeconomics are introduced in order to explore the recent financial crises
in the developing world. In the course we will examine the sources of economic
instability with reference to competing models of financial crises. Macro
policy responses to financial crises in developing countries are examined. We
will also explore problems in domestic and international financial markets that
contribute to financial crises. The role of the IMF and proposals for reform of
the international financial architecture are critically appraised.
Required readings are listed after each sub-topic.
Most of the readings are taken from working papers and conference papers that
are part of the National Bureau of Economic
Research Research Project Exchange Rate Crises in
Emerging Markets. You can download these papers from that web site
http://www.nber.org/crisis/ or from the web site for each conference,
including: ; NBER
Conference on Economic and Financial Crises in Emerging Market Economies ,
edited by Martin feldstein,October 19, 2000; NBER Conference on
Currency Crises Prevention January 11-13, 2001,edited by Sebastian Edwards
and Jeffrey Frankel; NBER Conference on
Management of Currency Crises March 28 - 31, 2001 edited by Michael Dooley
and Jeffrey Frankel, NBER Project on
Exchange Rate Crises in Emerging Markets: Malaysia February 16, 2001.
Some papers are IMF working papers, and papers
from the series of conferences on financial crises organized by the IMF,
including: First
Annual IMF Research Conference November 9, 2000; and Second
Annual IMF Research Conference November29–30, 2001; several papers are
World Bank Working Papers.
Some papers are from the web site created by Nouriel Roubini called 'Asia
Crises Homepage'.
TOPICAL OUTLINE
I. Theoretical Issues: The
Causes of Financial Crises in Developing Economies (Jan 12-31)
Required Reading
R. P. Flood and N. P. Marion, "Perspectives on the Recent Currency
Crises Literature," NBER Working Paper 6380.
Assigned Readings
A. First Generation Models: Getting Macroeconomic Policies
Wrong
Giancarlo Corsetti, Paolo Pesenti,
and Nouriel Roubini, "Paper Tigers? A Model of the Asian Crisis," NBER Working Paper 6783.
Michael Dooley, "A Model of Crises in Emerging Markets,"
NBER Working Paper 6300.
B. Second Generation
Models: Investor Panic and Multiple Equilibria
Robert Chang and Andres Velasco, "The Asian Liquidity Crises," NBER
Working Paper 6796.
Steve Radelet and Jeffrey Sachs. The Onset of the East Asian Financial Crisis"
March 1998.(Roubini web
site)
Steven Radelet and Jeffrey Sachs. January
1999. "What have we learned, so far, from the East Asian
Financial Crisis?" .(Roubini web site)
C. Third and
Fourth Generation Models: Balance Sheets and Financial Market Distortions
Paul Krugman: Crises: The Next
Generation? March 2001.(Roubini web site)
Paul Krugman Balance sheets, the transfer problem, and financial crises.. December 1998. .(Roubini web site)
Paul Krugman
"What Happened to Asia?" (1/98) .(Roubini web site)
II. Contagion
and Vulnerability to Financial Crises (Feb.1-14)
Required Readings
ROBERTO RIGOBON, Contagion: How to Measure it?(Edwards abd Frankel, editors)
What Drives Contagion - Trade, Neighborhood, or Financial
Links? by L. Hernandez and R. Valdes March 1,
2001, (IMF Working Paper)
Assigned Readings
A.Trade and Contagion
SEBASTIAN
EDWARDS,
Does the Current Account Matter? (Edwards
and Frenkel, editors)
KRISTIN
FORBES, How Important is Trade in the International Spread of
Crises?(Edwards and Frankel, editors)
B. All
Markets:
Volatility Dependence and Contagion in Emerging Equity
Markets by S. Edwards and R. Susmel
October 2001(NBER Working Paper
No. w8506)
Market Integration and Contagion by G. Bekaert, C. Harvey, and A. Ng NBER Feb 2003 (.pdf)
Aaron Tornell, "Common Fundamentals in the Tequila and Asian Crises,"
NBER Working Paper 7139.
C.Latin America:
Capital Flows, Country Risk and Contagion
by Norbert Fiess World Bank Dec 2002 (.pdf)
Kristin
Forbes and Roberto Rigobon, "Contagion in Latin America: Definitions, Measurement, and
Policy Implications," NBER Working Paper 7885.
D. Asia:
High-Frequency Contagion of Currency Crises in Asia
by T. Ito and Y. Hashimoto NBER Dec 2002
Volatility and Contagion in a Financially Integrated World:
Lessons from East Asia's Recent Experience by Pedro Alba, Amar
Bhattacharya, Stijn Claessens,
Swati Gosh, and Leonardo Hernandez (11/98)
World Bank Working Paper
Financial Contagion and Investor "Learning": An
Empirical Investigation by R. Basu
IMF Dec 1, 2002
E. Russia:
IMF: International Contagion Effects from the Russian Crisis
and the LTCM Near-Collapse by M. Dungey,
R. Fry, B. Gonzalez-Hermosillo and V. Martin April 1, 2002 IMF Working Paper
No. 02/74
III. Stabilization
Policy (Feb.15-Mar.6)
Required
Readings
Anne Krueger,
IMF Stabilization Programs (Feldstein,
editor).
Barry Eichengreen and Andrew Rose,To Defend or Not to
Defend? That is the Question(Dooley and
Frankel, editors)
Javier Hamann and Alessandro Prati "Why Do Many Disinflations Fail? (Second
IMF Research Conference).
Assigned
Readings
A.Fiscal Policy
MARTIN
EICHENBAUM and SERGIO REBELO, CRAIG BURNSIDE,On the Fiscal
Implications of Twin Crises(Dooley and
Frankel, editors)
Sebastian
Edwards, "Debt Relief and Fiscal Sustainability,"
NBER Working Paper 8939
Marco Cangiano,
E. Baldacci, S. Mahfouz, andAxel Schimmelpfenning "The Effectiveness of Fiscal Policy in Stimulating Economic
Activity: An Empirical Investigation(Second IMF Research
Conference)..
B.Monetary Policy
ALLAN DRAZEN,Interest Rate Defense
Against Speculative Attack as a Signal:
A Primer (Dooley and Frankel, editors).
Frederic S. Mishkin and Miguel A. Savastano,
"Monetary Policy Strategies for Latin America,"
NBER Working Paper 7617.
LUIS FELIPE CESPEDES, ROBERTO CHANG,
ANDRES VELASCO, Balance Sheets,Exchange Rate Regimes,and Credible Monetary Policy
(Edwards and Frenkel, editors)
C.Exchange Rate Policy
Sebastian
Edwards, "Exchange Rates in Emerging Economies: What Do We know? and
What Do We Need to Know?" NBER Working Paper 7228.
Axel A. Weber and Günter Beck "Economic Integration and the Exchange Rate Regime: How
Damaging are Currency Crises? Second IMF Research
Conference).
Sebastian Edwards,Exchange Rate
Regimes, Capital Flows, and Crisis Prevention(Feldstein, Editor)
Jeffrey A.
Frankel, "No Single Currency regime is Right for All Countries or All
Times," NBER Working Paper 7338.
IV. Financial
Markets and Financial Market Reforms in Developing Economies (Mar 7- 19)
Required Reading
Edward Kane, "Capital Movements Banking Insolvency, and Silent Runs in the
Asian Financial Crises," NBER Working Paper 7514.
Assigned Readings
A.Banking Reform
STIJN CLAESSENS, DAIELA KLINGEBIEL
and LUC LAEVEN,Financial
Restructuring in Systemic CrisesWhat
Policies to Pursue?
(Dooley and
Frankel, editors).
ROBERT DEKLE,
KENNETH KLETZER, Domestic Bank Regulation and Financial Crises:Theory
and Empirical Evidence from East Asia (Edwards and Frankel, editors).
B. Capital
Markets and Capital Flows
Takatoshi Ito, "Capital Flows in Asia," NBER Working
Paper 7134.
Dani Rodrik and Andres Velasco, "Short Term Capital Flows," NBER
Working Paper 7364.
Robert E. Lipsey,
"Foreign Direct Investors in Three Financial Crises,"
NBER Working Paper 8084.
C. Capital Controls
Sebastian Edwards, "Exchange
Rate Regimes, Capital Flows, and Crises Prevention," (Feldstein, editor).
RUDIGER
DORNBUSCH, Malaysia: Was it Different? (Edwards and Frankel, editors).
ETHAN KAPLAN, DANI RODRIK, 
Did
the Malaysian Capital Controls Work? (Edwards and Frankel,
editors)
V. Political
Economy of Financial Crises and Economic Reform in Emerging Nations (Mar 28-Apr
10)
Required
Reading
YUNG CHUL PARK, A Post Paradigm of Development for East
Asia: Governance, Markets, and InstitutionsNBER Conference on Malaysia
Allan Drazen Conditionality and Ownership in IMF Lending: A Political
Economy Approach(Second IMF Research Conference).
Robert Barro and Jong-Wha Lee "IMF Programs: Who Is Chosen and What Are the Effects? (Second IMF Research Conference).
Assigned
Readings
SHANG-JIN
WEI, Negative Alchemy? Corruption, Composition of Capital Flows
and Currency Crises(Edwards and Frankel, editors)
Simon Johnson
and Todd Mitton, "Cronyism and Capital Controls: Evidence from Malaysia,"
NBER Working Paper 8521.
Beata Smarzynska, and Shang Jin Wei, "Corruption and the Composition of Foreign Direct Investment:
Firm Level Evidence," NBER Working Paper 7969.
VI. Reforming the
International Financial Architecture (Apr. 11-30)
Required Readings
Kenneth Rogoff,
"International Institutions for reducing Global Financial
Instability," NBER Working Paper 7265.
Stanley Fischer, "Financial Crises and Reform of the International Financial
System," NBER Working Paper 9297.
Assigned Readings
A. Policies in Emerging
and Developed Countries to Resolve Financial Crises
Martin Feldstein,
"Self Protection for Emerging Market Economies,"
NBER Working Paper 6907.
B. Policies in Industrial Countries
William Cline The Role of the Private Sector in Resolving Financial Crises
in Emerging Markets (Feldstein editor)
Jeffrey Frenkel and Nouriel Roubini, The Role of Industrial Country Policies in Emerging Market
Crises(Feldstein Editor)
GIANCARLO
CORSETTI, PAOLO PESENTI, NOURIEL ROUBINI, The Role of Large Players in Currency Crises(Edwards
and Frankel, editors)
C. Structural
Adjustment Programs and Poverty
WILLIAM
EASTERLY, IMF and World Bank Structural Adjustment Programs and
Poverty (Dooley and Frankel, editors).
Tito Cordella and Giovanni Dell'Ariccia
"Limits of Conditionality in Poverty Reduction Programs(Second
IMF Research Conference).
D. Evaluating
the Success and Failure of IMF Programs
Anna Ivanova , Wolfgang Mayer, George Anayiotos,
and Alexandros Mourmouras"What Explains the
Success and Failure of Fund-Supported Programs? (Second IMF Research Conference).
MICHAEL
HUTCHISON,A Cure Worse Than The Disease? Currency Crises and the
Output Costs of IMF-Supported Stabilization Programs:
(Dooley and Frankel, editors).
E. An
International Lender of Last Resort
Frederic K. Mishkin, "Lessons From the Asian Crises," NBER
Working Paper 7102.
OLIVIER JEANNE, CHARLES WYPLOSZ, The International Lender of Last Resort: How Large is Large
Enough (Dooley and Frankel, editors).
F,.Reforming the IMF and World Bank
MICHAEL
DOOLEY, SUJATA VERMA,The IMF and
"Bailing In" the Private Sector(Dooley
and Frankel, editors)
MORRIS GOLDSTEIN,An Evaluation of
Proposals to Reform the International Finanacial Architecture (Dooley and
Frankel, editors).
COURSE
REQUIREMENTS
The seminar
will combine lectures and class discussion on these issues. Class attendance
and class participation are required. Students should plan to have read the
required readings on each issue prior to the class in which the issue is
discussed. Other readings will be assigned to individual seminar members to
report to the class. The reports should include a summary of the major ideas in
the paper and a critical assessment based upon the other readings and source
materials. Copies of the report should be distributed prior to the seminar session
in which the report is to be presented.
Each student
is required to submit a research proposal which is due on the last day of
class. The purpose of the research proposal is to help you to identify a
research project that you could pursue and possibly to w rite a thesis. The
research proposal should include a thesis statement, preferably in the form of
a verifiable hypothesis; a preliminary literature review; a preliminary
proposed methodology including relevant theory and econometric analysis, and in
the case of applied research at least a preliminary assessment of data sources
and availability. The operative word here is preliminary, you are not expected
to have any part of the research proposal on a final completed form; but rather
use the research project as an opportunity to determine whether this is a
viable research project based upon your preliminary assessment. The work on the
research proposal may also be used to fulfill requirements in other graduate
courses such as the research seminar. The final grade is based upon the work in
the seminar (75%) and the research proposal (25%)