National Innovation Efficiency During the Global Crisis: A Cross-Country Analysis
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Theories focusing on the sources of financial crises have recognized the importance of sharp movements in asset and credit markets. A financial crisis often occurs together with one or some of the following phenomena: a remarkable change in credit volume and asset prices, disruptive financial intermediation, immense balance sheet problems of firms, households, financial intermediaries and sovereigns or significant government support in the form of liquidity support and recapitalization.
The question may arise why neither financial market players nor policy makers anticipated the risks and tried to slow down the expansion of credit and increase in asset prices. Such phenomena have been around for centuries. Asset prices sometimes deviate from what fundamentals would suggest and move differently from the patterns of standard models.
Information asymmetries exist among intermediaries and in financial markets. Safety deserves a premium, and perverse spirals can be created. When the demand for quality assets increases, some of the lower quality may experience a sharp decline in their prices. The crises in the past exhibit the signs of those of recent recessions when the collapse of banking systems was preceded by a sharp increase in credit in real estate investment.
The East Asian financial crisis, for instance, in the late s is similar to the ones in the Northern countries. The experience of the United States in the Great Depression shows some similarity to the way leading to the recent global financial crisis in terms of an increase in household leverage or asset prices. Credit booms can be triggered by a wide range of factors, for example, shocks such as positive productivity shocks, economic policies and capital flows.
National Innovation Efficiency During the Global Crisis
Lagged GDP growth is positively associated with the probability of a credit boom. Increases in international financial flows can strengthen the credit booms. Global conditions also affect the national financial markets resulting in asset bubbles easily spill across borders. Capital inflows can extend the availability of funds for banks leading to relaxing credit constraints for corporations and households. Accommodative monetary policies have been connected to credit booms and excessive risk taking.
Risk-taking is usually higher when interest rates are lower and a shift to quality, when interest rates rise. The rapid increases in real estate prices and household leverage are explained by the relatively low interest rates in the US during the period — Structural factors such as financial liberalization and innovation facilitate more risk-taking and can also trigger credit booms. Empirical studies found that crises were often preceded by financial liberalization.
Shocks or liberalization keeps innovation in move.
Measuring innovation efficiency
Regulation, supervision and market discipline are not quick enough to catch up with greater competition and innovation. Vulnerabilities in credit markets can emerge. A decline in lending standards owing to stronger competition in financial services may contribute to financial fragility in the short run in particular. During financial crises, asset prices and credit booms and busts differ from the movements of a normal business cycle: booms are shorter and more intense than other upturns, and crunches and busts are longer, deeper and more violent than regular downturns. The violent episodes last longer [ 15 ].
Reinhart and Rogoff [ 16 ] distinguished two groups of crises, both including two types. The first group is classified on the basis of quantitative definitions, and the other depends mainly on qualitative and judgmental analysis. Currency crisis and sudden stop belong to the first group since these are measurable variables and allow the use of quantitative methodologies. Other crises are connected to adverse debt dynamics or banking system turmoil. Since these variables are not easy to measure, the use of qualitative methodologies is more appropriate.
When a country cannot service its foreign debt, the financial crisis takes the form of a sovereign or private or both debt crisis. In a systemic banking crisis, bank runs and failures can make the banks suspend the convertibility of their liabilities or force the government to intervene to prevent that by extending liquidity and capital assistance on a large scale. Research that has been conducted on the causes of the recent crisis revealed some factors similar to previous crises.
Although these factors may differ on the exact weights in different results features concluded in common are as follows: unsustainable asset price increases, credit booms leading to excessive debt burdens, build-up of marginal loans and systemic risk, and that regulation, supervision, and market discipline is too slow to catch up with greater competition and innovation. Nonetheless, the recent global financial crisis demonstrated some new factors in terms of its roots: widespread implementation of complex and nontransparent financial instruments, the high level of national and cross-border interconnectedness of financial markets, banks and institutions, the high degree of leverage of financial institutions and the role of the household sector.
Restoring confidence in the financial system, if possible at all, required immense government participation, outlays and guarantees. As for real and financial implications, they are hard and show common features with other episodes. They include large output losses and declines in consumption, investment and industrial production. Financial crises have large economic costs.
The average duration is longer, and output losses are larger than those of a recession not triggered by a financial crisis. So is the cumulative loss, the output loss relative to the peak before recession. Various approaches are used for measuring the real impact of a crisis on output. Adding up differences between trend growth and actual growth for some years after the crisis can show overall losses, which vary in different countries. On this basis, according to Laeven and Valencia [ 17 ], emerging markets tend to suffer larger losses due to the recent crisis than advanced economies, which can also differ significantly.
An indication of the significant costs that crises incur is consumption and overall welfare. In recessions associated with financial crises, a fall in consumption is 7—10 times larger than in those without such crises in emerging markets and consumption still keeps growing, though at a slower pace [ 18 ].
Financial variables show with large downward corrections. In advanced countries, credit falls by about 7.
The most remarkable hit on the real economy from a financial crisis is the lack of credit. Recoveries in aggregate output after credit crunches tend to take place before the revival of credit growth and turnaround in house prices. Sectors more dependent on external finance grow relatively less.
The timing of crises is more difficult or even impossible to predict than identifying vulnerabilities. In the late s, a radical financial deregulation process began that accelerated the evolution of financial markets.
Financial innovation took various forms and stimulated strong financial booms that ended up in crises. NFA created a framework for flawed practices and institutions which can be regarded as the deep financial roots of the recent crisis.
As a result of financial innovation, complex and opaque financial products became available in financial markets. They lacked transparency, which made it impossible to be priced correctly and therefore, lost liquidity when the boom ended. The explosion of these securities flowing through banks at a high rate created large profits, while destroyed the transparency which is necessary to ensure market efficiency. Large investment banks like Lehman and Merrill Lynch were given high ratings by international rating agencies enabling them to borrow at a low price.
Instead of exposing risk, the agencies systematically disguised it. The recent economic crisis was remarkable not only because of its severity and size but of its nature. The true nature of the underlying situation seems to be difficult to reveal since trading of over-the-counter OTC derivatives, especially the ones which take the form of collateralized debt obligations CDOs , accounts for confusing those who attempt to paint a clear picture. Collateralized debt obligations are structured financial products that pool together assets such as mortgages, bonds and loans which serve as collateral for the CDO.
The creation of asset-backed securities enabled the banks to increase their leverage significantly.senjouin-kikishiro.com/images/fygyrogyl/1844.php
These structured financial products were particularly attractive assets for banks to keep because they could be held off-balance-sheet with no capital adequacy requirements. Derivatives are financial contracts that derive their value from the performance of the underlying asset, the most common of which contain commodities, stocks, bonds, interest rates, currencies or other. On the other hand, however, they can suffer massive losses in case of opposite moves in price.
The Third Basel Accord is a global regulatory standard on bank capital reserves. According to the Basel III rule, the banks are required to hold 4. There was no need for a percentage of the value of these assets to be held as a capital reserve.
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CDOs, which comprised loans of different quality, and other derivatives were distributed widely between the dominant institutions in the financial system. They were regarded as relatively safe, since they were given a high rating by rating agencies, while in fact, their credit worthiness and cash flow possibilities were doubtful. This was an unsustainable situation. In late , the whole financial network came under strain questioning the viability of many financial instruments leading to the withdrawal of these funds from Wall Street investment banks and associated institutes.
Wall Street investment banks were able to evade regulatory constraints. These banks do not take deposits and have no access to central bank funding or debt guarantees. They deal with short-term funding on asset-backed commercial papers and provide cash loans against collateral as security or long-term loans like mortgages. Shadow banks with less-risk aversion did not mind having clients not eligible to applying for loans. Due to high interconnectedness, they can contribute to increasing systemic risk indirectly as well. Without the support of their central bank as lender of last resort, they are unable to refinance their short-term liabilities.
The shadow banking system is blamed for significantly contributing to the global financial crisis of — [ 21 ]. As a part of the financial sector reform, noncleared OTC transactions are to be shifted to central counterparties, which would result in a better risk management and resiliency in accordance with giving more transparency to the OTC market. A thorough analysis of the consequences and best responses to crises has become an integral part of the policy debates.
Obstfeld [ 1 ] suggested a new policy trilemma for currency unions: 1 cross border financial integration, 2 financial stability and 3 national fiscal independence cannot be simultaneously maintained within the union after a certain level of the financial integration has been reached. Conclusively, financial integration and independent national fiscal policy do not create financial stability. Consequently, if countries sacrifice the options of financial restraint and capital controls, they cannot credibly backstop their financial systems without external fiscal support. A country reliant mainly on its own fiscal resources will likely give up on financial integration as well as stability because financial risks will be assessed nationally by the markets.
As an alternative, if a country with limited fiscal space withdraws from the integrated financial market, it may control and insulate its financial sector in order to reduce fragility to the minimum level. Any diagnosis that overemphasizes the lack of enforcement of existing fiscal rules is partial. Initially, architects were concerned with monetary policy, fiscal policy and structural reform in nonfinancial markets, for example, labor markets, leaving the financial dimension out of scope.
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The process of financial integration, ruling optimism concerning risk and growth, as well as global liquidity, created credit conditions at the time when monetary union began to work resulted in excessive borrowing.