1,721,195 research outputs found
Financial crises in Japan during the 20th century
No full textI have two aims with this paper. Firstly, I would like to extract lessons for theory and policy from Japan’s experience with banking crises. As such, this paper falls into the body of research on banking crises, recent works within which include Caprio and Klingebiel (1996), Caprio et al. (2005), Demirgüç-Kunt and Detragiache (2005), Werner (2005), Beck et al. (2006), and Reinhart and Rogoff (2008). Secondly, I aim to gain insights into the link between the banking sector and the economy (which are again of importance for both theory and policy). This is an important topic that has slowly but steadily grown to a substantial body of literature. Many authors recognise that banks are ‘special’ in some way (Fama, 1985, Bossone, 1999, James and Smith, 2000, Ashcraft, 2005), and that the link between the banking sector and the economy is of great importance (King and Levine, 1996, Levine, 1997). However, the precise details of just what makes banks special, as well as the precise nature of their link to the economy have remained unclear or at least disputed. Analysing crises may help elucidate these issues
A lost century in economics: three theories of banking and the conclusive evidence
Full text linkHow do banks operate and where does the money supply come from? The financial crisis has heightened awareness that these questions have been unduly neglected by many researchers. During the past century, three different theories of banking were dominant at different times: (1) The currently prevalent financial intermediation theory of banking says that banks collect deposits and then lend these out, just like other non-bank financial intermediaries. (2) The older fractional reserve theory of banking says that each individual bank is a financial intermediary without the power to create money, but the banking system collectively is able to create money through the process of ‘multiple deposit expansion’ (the ‘money multiplier’). (3) The credit creation theory of banking, predominant a century ago, does not consider banks as financial intermediaries that gather deposits to lend out, but instead argues that each individual bank creates credit and money newly when granting a bank loan. The theories differ in their accounting treatment of bank lending as well as in their policy implications. Since according to the dominant financial intermediation theory banks are virtually identical with other non-bank financial intermediaries, they are not usually included in the economic models used in economics or by central bankers. Moreover, the theory of banks as intermediaries provides the rationale for capital adequacy-based bank regulation. Should this theory not be correct, currently prevailing economics modelling and policy-making would be without empirical foundation. Despite the importance of this question, so far only one empirical test of the three theories has been reported in learned journals. This paper presents a second empirical test, using an alternative methodology, which allows control for all other factors. The financial intermediation and the fractional reserve theories of banking are rejected by the evidence. This finding throws doubt on the rationale for regulating bank capital adequacy to avoid banking crises, as the case study of Credit Suisse during the crisis illustrates. The finding indicates that advice to encourage developing countries to borrow from abroad is misguided. The question is considered why the economics profession has failed over most of the past century to make any progress concerning knowledge of the monetary system, and why it instead moved ever further away from the truth as already recognised by the credit creation theory well over a century ago. The role of conflicts of interest and interested parties in shaping the current bank-free academic consensus is discussed. A number of avenues for needed further research are indicate
Towards a new research programme on ‘banking and the economy’ - implications of the quantity theory of credit for the prevention and resolution of banking and debt crises
No full textThe financial crisis has triggered a new consensus among economists that it is necessary to include a banking sector in macroeconomic models. It is also necessary for the finance and banking literature to consider how best to incorporate systemic, macroeconomic feedbacks into its modeling of financial intermediation. Thus a new research programme on the link between banking and the economy is needed. This special issue is devoted to this theme. In this paper an overview of the issues and problems in the economics and finance literature is presented, and a concrete, simple approach is identified of how to incorporate banks into a macroeconomic model that solves many of these issues. The model distinguishes between the type of credit that boosts GDP and credit that is associated with asset prices and banking crises. The model is consistent with the empirical record. Some applications are discussed, namely the prediction and prevention of banking crises, implications for fiscal policy, and a solution to the European sovereign debt crisis that stimulates growth while avoiding the corner solutions of euro exit or fiscal union
Enhanced Debt Management: solving the eurozone crisis by linking debt management with fiscal and monetary policy
Full text linkUnconventional approaches to suit unusual circumstances have become acceptable in monetary policy, a formerly highly conservative discipline. In this paper it is argued that unconventional approaches should also be considered in sovereign debt management, in order to contribute to resolving the eurozone sovereign debt crisis. First, the Troika crisis lending to indebted sovereign borrowers in the eurozone is reviewed and compared with standard IMF post-crisis lending. The main difference and shortcoming is the unsustainable character of the eurozone approach, due to the omission of demand stimulation components. To address this and other shortcomings, the features of an ideal alternative funding tool are identified. It would solve the funding problems of affected sovereigns, help stabilise the banking system, but most of all stimulate domestic demand and hence end the vicious downward spiral. It is found that this funding method can be implemented as part of enhanced public debt management by each nation’s debt management office
How to create a recovery through ‘Quantitative Monetary Easing’
No full textThis article explains the causes of banking crises and proposes suitable policies to resolve them and stimulate a swift recovery. It is applied to the Japanese situation and was published in 1995, presenting a new concept of monetary policy, dubbed by the author 'quantitative monetary easing', or short, as also mentioned in the text, 'quantitative easing'. The definition of this concept is to expand the quantity of total credit creation, especially used for GDP transactions. Unsustainable asset bubbles are seen as being caused by substantial credit creation in excess of nominal GDP growth. Central banks can intervene and by adopting quantitative easing end the banking crisis and stimulate a swift recovery
The unintended consequences of the debt ... will increased government expenditure hurt the economy?
Full text linkIn 2008, governments in many countries embarked on large fiscal expenditure programmes, with the intention to support the economy and prevent a more serious recession. In this study, the overall impact of a substantial increase in fiscal expenditure is considered by providing a novel analysis of the most relevant recent experience in similar circumstances, namely that of Japan in the 1990s. Then a weak economy with risk-averse banks seemed to require some of the largest peacetime fiscal stimulation programmes on record, albeit with disappointing results. The explanations provided by the literature and their unsatisfactory empirical record are reviewed. An alternative explanation, derived from early Keynesian models on the ineffectiveness of fiscal policy is presented in the form of a modified Fisher-equation, which incorporates the recent findings in the credit view literature. The model postulates complete quantity crowding out. It is subjected to empirical tests, which were supportive. Thus evidence is found that fiscal policy, if not supported by suitable monetary policy, is likely to crowd out private sector demand, even in an environment of falling or near-zero interest rates. As a policy conclusion it is pointed out that by changing the funding strategy, complete crowding out can be avoided and a positive net effect produced. The proposed framework creates common ground between proponents of Keynesian views (as held, among others, by Blinder and Solow), monetarist views (as held in particular by Milton Friedman) and those of leading contemporary macroeconomists (such as Mankiw)
Princes of the Yen: Japan's central bankers and the transformation of the economy
No full textThis eye-opening book offers a disturbing new look at Japan's post-war economy and the key factors that shaped it. It gives special emphasis to the 1980s and 1990s when Japan's economy experienced vast swings in activity.According to the author, the most recent upheaval in the Japanese economy is the result of the policies of a central bank less concerned with stimulating the economy than with its own turf battles and its ideological agenda to change Japan's economic structure. The book combines new historical research with an in-depth behind-the-scenes account of the bureaucratic competition between Japan's most important institutions: the Ministry of Finance and the Bank of Japan. Drawing on new economic data and first-hand eyewitness accounts, it reveals little known monetary policy tools at the core of Japan's business cycle, identifies the key figures behind Japan's economy, and discusses their agenda. The book also highlights the implications for the rest of the world, and raises important questions about the concentration of power within central banks
Towards stable and competitive banking in the UK - evidence for the Independent Commission on Banking (ICB)
No full textIn order to achieve all the goals aimed at by the ICB, two reforms are necessary that are of modest nature and that allow banks to continue to function largely as they do currently (specifically, they allow banks to continue their creation of credit).These proposals are to- impose direct regulation of the quantity and quality of bank credit- change the structure of the banking sector in the UK to make it more similar to theGerman banking sector.The regulation of credit would take the form of restricting bank credit creation for transactions that are unsustainable – namely transactions that do not contribute to GDP, i.e. the financial transactions. Furthermore, the government (or central bank) should control the quantity of credit that banks are allowed to create, while closely monitoring the allocation (the use credit is put to). The ‘guidance’ of the quantity and allocation of credit towards productive purposes has been the single most important factor in the success of the ‘East Asian miracle’ economies Japan, China, Korea and Taiwan.The reform of the banking sector would introduce a large, but currently virtually non-existing element of locally-owned banks. These would take the two competing forms of local cityowned banks and local credit unions (cooperative banks). In Germany, they account for about 70% of the banking sector, while in the UK currently for less than 1%. It is argued that this banking structure has been the single most important structural reason for the performance of the German economy, as well as other countries (such as Japan).The proposed reforms would achieve the goals sought by the ICB, virtually without the need for any other reforms. The costs and disruption of introducing the reforms would be minimal, while the benefits would be significant. They would include the end of the boom-bust cycles and banking crises, while achieving a more stable banking sector and sustainable economic performance
New paradigm in macroeconomics: solving the riddle of Japanese macroeconomic performance
No full textModern mainstream economics is attracting an increasing number of critics of its high degree of abstraction and lack of relevance to economic reality. Economists are calling for a better reflection of the reality of imperfect information, the role of banks and credit markets, the mechanisms of economic growth, the role of institutions and the possibility that markets may not clear. While it is one thing to find flaws in current mainstream economics, it is another to offer an alternative paradigm which, can explain as much as the old, but can also account for the many 'anomalies'. That is what this book attempts. Since one of the biggest empirical challenges to the 'old' paradigm has been raised by the second largest economy in the world - Japan - this book puts the proposed 'new paradigm' to the severe test of the Japanese macroeconomic reality
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