Private Sector Involvement and International Financial Crises: An Analytical Perspective

By Michael Chui; Prasanna Gai | Go to book overview

Foreword

How should the international financial architecture be designed? This book provides a theoretical framework to answer this important question. It starts with an accessible account of the literature on financial crises. There are two types of explanation for the occurrence of financial crises. These are the sunspot-based and fundamentals-based explanations. According to the sunspot-based approach, there are multiple equilibria. If people believe there will be no crisis then this belief is self-fulfilling. On the other hand if people believe there will be a crisis then these beliefs will also be self-fulfilling. What determines which equilibrium will occur? One way of modelling this is to suggest that an exogenous event such as a sunspot will be the coordinating device. This is not a very satisfactory explanation of equilibrium selection. The second approach is based on the business cycle. If people believe the economy is going to enter a recession they worry about the ability of banks and other agents to make payments on debt contracts. In order to ensure that they can receive the full amount they are owed they demand early payment and this leads to a crisis.

The book does a nice job of showing how these two approaches can be reconciled using developments in the recent literature on global games. The weakness of the sunspot-based approach is the equilibrium selection mechanism. If there is a lack of common knowledge about future economic prospects then it can be shown that a unique equilibrium exists even when there exist common knowledge multiple equilibria. When on average signals about future economic prospects are above some critical level there will not be a crisis, but when they are below there will be. This approach underlines the importance of leading economic indicators for crisis prediction. The first part of the book closes with a critical examination of this literature.

The second part of the book considers how the international financial architecture should be reformed. Sovereign bankruptcy is at the centre of this debate. Ex ante it is desirable to provide good incentives for debtors to repay creditors by having tough penalties in the event of default. Ex post it is desirable to try and work out defaults with the minimum waste of resources possible. These two goals are usually in conflict and the policy problem is to balance them in a sensible way.

-v-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Private Sector Involvement and International Financial Crises: An Analytical Perspective
Table of contents

Table of contents

  • Private Sector Involvement and International Financial Crises: An Analytical Perspective iii
  • Foreword v
  • Preface vii
  • Contents ix
  • List of Figures xi
  • List of Tables xiii
  • Part I the Analytics of Crisis 13
  • Part II Reforming the International Financial Architecture 103
  • Appendix a Solution to the First-Order Differential Equation 187
  • Bibliography 195
  • Index 205
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
/ 210

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.