Glossary of Concepts Flashcards
Hidden Debts Diaz Alejandro (1985) and Velasco (1986)
Countries have explicit and implicit off-the-book debt guarantees (or what the IMF calls Contingent Liabilities),
Debt Intolerance
Reinhart, Rogoff, Savastano
Countries with weak institutions cannot handle debt levels considered safe. (50% of crises had debt levels that were compliant with the Maastricht Treaty)
Serial Default
Reinhart, Rogoff, Savastano
Multiple sovereign defaults that are either wholesale or partial.
Original sin
Eichengreen, Hausmann, Panizza
Two kinds of original sin: (1) domestic variety: domestic residents cannot borrow money in their own currency, (2) countries cannot borrow abroad in their own currency.
Sudden Stops
Calvo, Calvo, and Izquierdo
Sudden drop in capital flows below 2 standard deviations from its sample mean. Sudden stop begins when capital flows fall below 1 standard deviation.
Overborrowing Syndrome
McKinnon and Pill
Moral hazard as possible cause of overborrowing – the situation when banks lend more in the expectation of a future bailout. Two possible explanations: (1) credit booms, (2) Unhedged currency risk.
Give the six different types of financial crises
(1) Banking crises - Type I: Systemic / Severe, Type II: Borderline
(2) Currency crash
(3) Currency conversion (usually after crash)
(4) External debt crisis
(5) Domestic debt crisis
(6) Inflation crisis
What is the difference between Type I and Type II banking crises?
Type I, called severe or systemic banking crises, involve bank runs and the closure, merger, or takeover of financial institutions. Type II, called borderline or milder banking crises, do not necessarily involve bank runs but may still involve the closure, merger, or takeover of financial institutions.
At what level of depreciation does a currency crash?
15% currency depreciation against the dollar or an anchor currency year-on-year.
What happens in an external / domestic debt crisis?
This is when a country needs to renegotiate its loans under worse terms - either shorter maturities or higher rates.
At what level does an inflation crisis occur?
An inflation crisis occurs when it is 20% or more year on year.
This Time It’s Different Syndrome
Reinhart and Rogoff (2008)
It’s a situation when policymakers, central bankers, or leaders of financial institutions disregard evidence of crises because they blindly argue that there is a fundamental difference in their economy this time around..
