FINANCIAL CRISIS IN THE DEVELOPING WORLD - POST THE US "ASSET PRICE BUBBLE DEBACLE" - A NEW WAY FORWARD
Abstract
This paper analyze how we should respond to possible asset price bubbles, especially in view of the various conceptual frameworks proposed based on a core set of scientific principles for monetary policy. Further, efforts have also been made at my end to establish as to how Monetary policy should not react to asset price bubbles per se, but rather to changes in the outlook for inflation and aggregate demand resulting from asset price movements. However, regulatory policies and supervisory practices should respond to possible asset price bubbles and help prevent feedback loops between asset price bubbles and credit provision, thereby minimizing the damaging effects of bubbles on the economy.
The general massage of this paper is that credit conditions influence economies enormously and emergency steps to restructure balance sheets through policy revamping are crucial for fixing problems of excessive leverage. This stands in sharp contrast to the view from conventional models - that 'the effects of a worsening of financial intermediation are likely to be limited' and can be handled by interest rate cuts alone.
In the alternative regulatory policy approach, we have strived to examine three possible regulatory responses to managing bubbles: portfolio restrictions; adjustments in capital requirements; and adjustments in provisioning requirements.
JEL Classification: E58, E63, G15
Keywords:financial crisis, asset price bubble.
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References
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Kenneth Ballinger: Miami Millions, Miami: (self published), 1936. p. 139.
Three Australian Asset-price Bubbles”, The Reserve Bank of Australia, 2003. Available at http:/ /www.rba.gov.au/PublicationsAndResearch/2003/Simon.pdf.
Bank of Japan, “Asset Price Bubble in Japan in the 1980s: Lessons for Financial and Macroeconomic Stability” http://www.imes.boj.or.jp/english/publication/edps/2003/03-E-15.pdf.
“Japan’s Bubble Economy”.http://www.sjsu.edu/faculty/watkins/bubble.htm.
Kaufman, GG., Krueger, TH., Hunter, WC. (1999). The Asian Financial Crisis: Origins, Implications and Solutions. Springer. ISBN 0792384725.
International Monetary Fund’s report in World Economic Outlook, titled, “Growth and Institutions”, published in April 2003, available at: http://www.imf.org/external/pubs/ft/weo/2003/01/index.htm
Identifying Asset Price Bubbles in the Housing Market in India - Preliminary Evidence, Reserve Bank of India Occasional Papers, Vol. 27, No. 1 and 2, Summer and Monsoon 2006.
Ibid.
An In-Depth Analysis of the East Asian Crisis: Special Implications for India, Subhajit Sr., Indira Gandhi Institute of Development Research (IGIDR), 2008, accessible at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1152131.
International Monetary Fund’s report in World Economic Outlook, titled, “Growth and Institutions”, published in April 2003, available at http://www.imf.org/external/pubs/ft/weo/2003/01/index.htm.
Asset Price Booms and Monetary Policy”, Carsten Detken and Frank Smets, European Central Bank (ECB), 2004, accessible at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=533122.
Rethinking Capital Regulation”, Kashyap, A.K., R. Rajan and J.C Stein, 2008.
Liquidity and financial cycles”, Adrian, Tobias and Hyun Song Shin, 2007, Mimeo Princeton University.
The Panic of 2007", Gary Gorton, 2008, Yale School of Management and NBER, Prepared for the Federal Reserve Bank of Kansas City, Jackson Hole Conference, August 2008, accessible at http://www.kc.frb.org/publicat/sympos/2008/gorton.08.04.08.pdf.
Bank Restructuring: Lessons from the 1980s”,Sheng, Andrew, Washington, D.C.: World Bank, 1996.
Why Paulson is wrong”: Economists Voice, Zingales, Luigi, 2008, The Berkeley Electronic Press.
Credit Cycles”, Kiyotaki, Nobuhiro, and John Moore, Journal of Political Economy, 105, 1997.
We aren’t done yet: Comments on the financial crises and Bailout”, Stiglitz, Joseph E, 2008, Economists’ Voice: The Berkeley Electronic Press, (October).
Why Central Banks Should Burst Bubbles”, Roubini, Nouriel, 2006, International Finance Journal.
Synchronization risk and delayed arbitrage”, Abreu, Dilip and Markus K. Brunnermeier,2002,Journal of Financial Economics, Vol. 66(2-3), pp. 341-360.; Also See “Bubbles and Crashes”,Abreu, Dilip and Markus K. Brunnermeier, 2003, Econometrica, Vol. 71(1), pp. 173-204.
Housing and Business Cycle”, World Economic Outlook, 2008 International Monetary Fund, accesible at http://www.imf.org/external/pubs/ft/weo/2008/01/index.htm.
Review of Annual Statement on Monetary Policy for the Year 2006-07, Reserve Bank of India, 2006.
Monetary Policy and Asset Price Volatility, Bernanke, Ben, and Mark Gertler, 1999, In New Challenges for Monetary Policy: A Symposium Sponsored by the Federal Reserve Bank of Kansas City: 77-128. Federal Reserve Bank of Kansas City.
Asset Prices and Central Bank Policy”, Cecchetti, Stephen G., Hans Genberg, John Lipsky, and Sushil Wadhwani,2003, Journal of Money, Credit and Banking.
Asset Price Bubbles and Prudential Regulation”, Working Paper 3, September 2001, Australian Prudential Regulation Authority, accessible at http://www.apra.gov.au/Policy/upload/Asset-Price-Bubbles-and-Prudential-Regulation-Sep2001.pdf.
Anatomy of a Typical Financial Crisis”, Charles Kindleberger, 1989, accessible at http://delong.typepad.com/egregious_moderation/2009/01/charles-kindleberger-anatomy-of-typical-
financial-crisis.html
Financial Contagion”, Franklin Allen and Douglas Gale, The Journal of Political Economy, Vol. 108, No. 1. (Feb., 2000), accessible at http://links.jstor.org/sici?sici=0022-3808%28200002%29108%3A1%3C1%3AFC%3E2.0.CO%3B2-D.
Monetary Policy and Asset Price Volatility, Bernanke, Ben, and Mark Gertler, 1999, In New Challenges for Monetary Policy: A Symposium Sponsored by the Federal Reserve Bank of Kansas City: 77-128. Federal Reserve Bank of Kansas City.
Asset Price, Reversals, Economic Instability, and Monetary Policy”, Bordo, M.D. and O. Jeanne, (2001), Paper presented at the Annual Meeting of the American Financial Association, New Orleans, January 7, 2001.
Asset Price Inflation and Monetary Policy”,Schwartz, A. J.,(2001),Paper presented at the Annual Meeting of the American Financial Association, New Orleans, 7 January.
Asset Price Bubbles and Monetary Policy’,Kent, C. and P. Lowe, 1997, Reserve Bank of Australia,
Research Discussion Paper 9709.
Managing Bank Capital’,Matten, C, 2000, John Wiley & Sons Ltd.,West Sussex. As cited in “Asset Price Bubbles and Prudential Regulation”, Working Paper 3, September 2001, Australian Prudential Regulation Authority, accessible at http://www.apra.gov.au/Policy/upload/Asset-Price-Bubbles-and-Prudential-Regulation-Sep2001.pdf.
Tulipomania: The Story of the World’s Most Coveted Flower & the Extraordinary Passions It Aroused.” Mike Dash (2001).
John O’Farrell, An Utterly Impartial History of Britain - Or 2000 Years of Upper Class Idiots In Charge (October 22 2007) (2007, Doubleday, ISBN 9780385611985). Also, see Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (Harriman House Classics 2003), p. 65 & 71.
Wolmar, C, 2007, Fire & Steam: A History of the Railways in Britain, Atlantic Book (London) ISBN 978-1-84354-629-0.
Kenneth Ballinger: Miami Millions, Miami: (self published), 1936. p. 139.
Three Australian Asset-price Bubbles”, The Reserve Bank of Australia, 2003. Available at http:/ /www.rba.gov.au/PublicationsAndResearch/2003/Simon.pdf.
Bank of Japan, “Asset Price Bubble in Japan in the 1980s: Lessons for Financial and Macroeconomic Stability” http://www.imes.boj.or.jp/english/publication/edps/2003/03-E-15.pdf.
“Japan’s Bubble Economy”.http://www.sjsu.edu/faculty/watkins/bubble.htm.
Kaufman, GG., Krueger, TH., Hunter, WC. (1999). The Asian Financial Crisis: Origins, Implications and Solutions. Springer. ISBN 0792384725.
International Monetary Fund’s report in World Economic Outlook, titled, “Growth and Institutions”, published in April 2003, available at: http://www.imf.org/external/pubs/ft/weo/2003/01/index.htm
Identifying Asset Price Bubbles in the Housing Market in India - Preliminary Evidence, Reserve Bank of India Occasional Papers, Vol. 27, No. 1 and 2, Summer and Monsoon 2006.
Ibid.
An In-Depth Analysis of the East Asian Crisis: Special Implications for India, Subhajit Sr., Indira Gandhi Institute of Development Research (IGIDR), 2008, accessible at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1152131.
International Monetary Fund’s report in World Economic Outlook, titled, “Growth and Institutions”, published in April 2003, available at http://www.imf.org/external/pubs/ft/weo/2003/01/index.htm.
Asset Price Booms and Monetary Policy”, Carsten Detken and Frank Smets, European Central Bank (ECB), 2004, accessible at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=533122.
Rethinking Capital Regulation”, Kashyap, A.K., R. Rajan and J.C Stein, 2008.
Liquidity and financial cycles”, Adrian, Tobias and Hyun Song Shin, 2007, Mimeo Princeton University.
The Panic of 2007", Gary Gorton, 2008, Yale School of Management and NBER, Prepared for the Federal Reserve Bank of Kansas City, Jackson Hole Conference, August 2008, accessible at http://www.kc.frb.org/publicat/sympos/2008/gorton.08.04.08.pdf.
Bank Restructuring: Lessons from the 1980s”,Sheng, Andrew, Washington, D.C.: World Bank, 1996.
Why Paulson is wrong”: Economists Voice, Zingales, Luigi, 2008, The Berkeley Electronic Press.
Credit Cycles”, Kiyotaki, Nobuhiro, and John Moore, Journal of Political Economy, 105, 1997.
We aren’t done yet: Comments on the financial crises and Bailout”, Stiglitz, Joseph E, 2008, Economists’ Voice: The Berkeley Electronic Press, (October).
Why Central Banks Should Burst Bubbles”, Roubini, Nouriel, 2006, International Finance Journal.
Synchronization risk and delayed arbitrage”, Abreu, Dilip and Markus K. Brunnermeier,2002,Journal of Financial Economics, Vol. 66(2-3), pp. 341-360.; Also See “Bubbles and Crashes”,Abreu, Dilip and Markus K. Brunnermeier, 2003, Econometrica, Vol. 71(1), pp. 173-204.
Housing and Business Cycle”, World Economic Outlook, 2008 International Monetary Fund, accesible at http://www.imf.org/external/pubs/ft/weo/2008/01/index.htm.
Review of Annual Statement on Monetary Policy for the Year 2006-07, Reserve Bank of India, 2006.
Monetary Policy and Asset Price Volatility, Bernanke, Ben, and Mark Gertler, 1999, In New Challenges for Monetary Policy: A Symposium Sponsored by the Federal Reserve Bank of Kansas City: 77-128. Federal Reserve Bank of Kansas City.
Asset Prices and Central Bank Policy”, Cecchetti, Stephen G., Hans Genberg, John Lipsky, and Sushil Wadhwani,2003, Journal of Money, Credit and Banking.
Asset Price Bubbles and Prudential Regulation”, Working Paper 3, September 2001, Australian Prudential Regulation Authority, accessible at http://www.apra.gov.au/Policy/upload/Asset-Price-Bubbles-and-Prudential-Regulation-Sep2001.pdf.
Anatomy of a Typical Financial Crisis”, Charles Kindleberger, 1989, accessible at http://delong.typepad.com/egregious_moderation/2009/01/charles-kindleberger-anatomy-of-typical-
financial-crisis.html
Financial Contagion”, Franklin Allen and Douglas Gale, The Journal of Political Economy, Vol. 108, No. 1. (Feb., 2000), accessible at http://links.jstor.org/sici?sici=0022-3808%28200002%29108%3A1%3C1%3AFC%3E2.0.CO%3B2-D.
Monetary Policy and Asset Price Volatility, Bernanke, Ben, and Mark Gertler, 1999, In New Challenges for Monetary Policy: A Symposium Sponsored by the Federal Reserve Bank of Kansas City: 77-128. Federal Reserve Bank of Kansas City.
Asset Price, Reversals, Economic Instability, and Monetary Policy”, Bordo, M.D. and O. Jeanne, (2001), Paper presented at the Annual Meeting of the American Financial Association, New Orleans, January 7, 2001.
Asset Price Inflation and Monetary Policy”,Schwartz, A. J.,(2001),Paper presented at the Annual Meeting of the American Financial Association, New Orleans, 7 January.
Asset Price Bubbles and Monetary Policy’,Kent, C. and P. Lowe, 1997, Reserve Bank of Australia,
Research Discussion Paper 9709.
Managing Bank Capital’,Matten, C, 2000, John Wiley & Sons Ltd.,West Sussex. As cited in “Asset Price Bubbles and Prudential Regulation”, Working Paper 3, September 2001, Australian Prudential Regulation Authority, accessible at http://www.apra.gov.au/Policy/upload/Asset-Price-Bubbles-and-Prudential-Regulation-Sep2001.pdf.
Published
2010-04-16
How to Cite
Chakraborty, M. S., & Banerjee, M. S. (2010). FINANCIAL CRISIS IN THE DEVELOPING WORLD - POST THE US "ASSET PRICE BUBBLE DEBACLE" - A NEW WAY FORWARD. Buletin Ekonomi Moneter Dan Perbankan, 12(1), 5-26. https://doi.org/10.21098/bemp.v12i1.465
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Buletin Ekonomi Moneter dan Perbankan / Bulletin of Monetary Economics and Banking is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
