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What Caused the Global Financial Crisis

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Author Info

  • Ouarda Merrouche
  • Erlend Nier

Abstract

This paper investigates empirically the drivers of financial imbalances ahead of the global financial crisis. Three factors may have contributed to the build-up of financial imbalances: (i) rising global imbalances (capital flows), (ii) monetary policy that might have been too loose, (iii) inadequate supervision and regulation. Panel data regressions are performed for OECD countries from 1999 to 2007, so as to shed light on the relative importance of these factors, as well as the extent to which these factors might have interacted in fuelling the build-up. We find that the build-up of financial imbalances was driven by capital inflows and an associated compression of the spread between long and short rates. The effect of capital inflows on the build-up is amplified where the supervisory and regulatory environment was relatively weak. We find that, by contrast, differences in monetary policy cannot account for differences across countries in the build-up of financial imbalances ahead of the crisis.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/265.

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Length: 64
Date of creation: 01 Nov 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/265

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Related research

Keywords: Bank credit; Bank supervision; Capital flows; Capital inflows; Current account balances; Financial sector; Global Financial Crisis 2008-2009; banking; banking sector; banking system; capital regulation; moral hazard; net capital; banking crises; inflation rate; bank deposits; current account deficit; composition of capital inflows; capital outflows; mortgage backed securities; current account balance; savings rate; deposit insurance; capital inflow; current account deficits; net capital flows; investment banking; capital flow; banking markets; flows of capital; return on equity; securitization; bank risk; capital budgeting; central banking; capital markets; international capital flows; bank lending; stock market; capital outflow; banking license; bank of england; banking supervision; government securities; international capital; bank regulations; capital controls; bank regulation; prudential regulation; net capital flow; bank risk taking; banking industry; bank capital; gross domestic product; banking institutions; hedge funds; bank risk-taking; bank group; bank activities; domestic credit; domestic liquidity; banking systems; bank balance sheets; problem bank; credit expansion; government bonds; bank accounts; banking theory; securities portfolios; real effective exchange rate; bank loans; commodity prices; banking law; global current account; capital structure; border capital flows; federal deposit insurance; debt securities; off balance sheet; bank restructuring; loss of confidence; return on assets; bank customer; banks ? balance sheet; bank charter; foreign exchange; bank failures; equity prices; banking crisis; net capital outflow;

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References

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  1. Viral V Acharya & Philipp Schnabl, 2010. "Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper during the Financial Crisis of 2007–09," IMF Economic Review, Palgrave Macmillan, vol. 58(1), pages 37-73, August.
  2. Jane Dokko & Brian Doyle & Michael T. Kiley & Jinill Kim & Shane Sherlund & Jae Sim & Skander Van den Heuvel, 2009. "Monetary policy and the housing bubble," Finance and Economics Discussion Series 2009-49, Board of Governors of the Federal Reserve System (U.S.).
  3. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2006. "An Equilibrium Model of Global Imbalances and Low Interest Rates," 2006 Meeting Papers 894, Society for Economic Dynamics.
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  16. Jean Imbs & Giovanni Favara, 2011. "Credit Supply and the Price of Housing," 2011 Meeting Papers 1342, Society for Economic Dynamics.
  17. Claudio Borio & Haibin Zhu, 2008. "Capital regulation, risk-taking and monetary policy: a missing link in the transmission mechanism?," BIS Working Papers 268, Bank for International Settlements.
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Citations

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Cited by:
  1. Tomasz Wieladek & Sergi Lanau, 2012. "Financial Regulation and the Current Account," IMF Working Papers 12/98, International Monetary Fund.
  2. Zorobabel Bicaba & Daniel Kapp & Francesco Molteni, 2011. "Stability periods between financial crises: The role of macroeconomic fundamentals and crises management policies," Documents de travail du Centre d'Economie de la Sorbonne 11064, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  3. Pierluigi Bologna, 2011. "Is there a Role for Funding in Explaining Recent U.S. Banks' Failures?," IMF Working Papers 11/180, International Monetary Fund.
  4. repec:hal:journl:halshs-00639869 is not listed on IDEAS
  5. Christian Hott & Terhi Jokipii, 2012. "Housing Bubbles and Interest Rates," Working Papers 2012-07, Swiss National Bank.
  6. Cihak, Martin & Demirguc-Kunt, Asli & Johnston, R. Barry, 2013. "Incentive audits : a new approach to financial regulation," Policy Research Working Paper Series 6308, The World Bank.
  7. Tadeusz Kowalski & Yochanan Shachmurove, 2011. "John Maynard Keynes: Is That you Knocking on the Door?," Working Papers 56, Department of Applied Econometrics, Warsaw School of Economics.
  8. Cihak, Martin & Demirguc-Kunt, Asli & Peria, Maria Soledad Martinez & Mohseni-Cheraghlou, Amin, 2012. "Bank regulation and supervision around the world : a crisis update," Policy Research Working Paper Series 6286, The World Bank.
  9. Erlend Nier & Luis Ignacio Jácome & Jacek Osinski & Pamela Madrid, 2011. "Towards Effective Macroprudential Policy Frameworks," IMF Working Papers 11/250, International Monetary Fund.
  10. Tadeusz Kowalski & Yochanan Shachmurove, 2011. "An Historical Walk Through Recent Financial Crises," PIER Working Paper Archive 11-019, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  11. Apostolos Thomadakis, 2012. "Contagion or Flight-to-Quality Phenomena in Stock and Bond Returns," School of Economics Discussion Papers 0612, School of Economics, University of Surrey.
  12. Demirguc-Kunt, Asli & Detragiache, Enrica & Merrouche, Ouarda, 2010. "Bank capital : lessons from the financial crisis," Policy Research Working Paper Series 5473, The World Bank.
  13. Kowalski, Tadeusz & Shachmurove, Yochanan, 2014. "The reaction of the U.S. and the European Monetary Union to recent global financial crises," Global Finance Journal, Elsevier, vol. 25(1), pages 27-47.

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