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Diploma Macro Paper 2
Monetary Macroeconomics
Lecture 8
Origins of recent crises
Mark Hayes
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Source: Reinhart, 2010, vox-eu
The Anatomy of a Financial Crisis
Assetprice
bust
Insolvency
at some
financial
institutions
Falling
confidence
in many
financial
institutions
Credit
crunch
(banks
reduce
lending)
Vicious circle
(recession puts more
pressure on asset prices
and financial institutions)
Recession
(from
falling
aggregate
demand)
Chart A MPC’s evaluation of GDP at the time of the
May Report, ONS data at that time and latest ONS data(a)
Sources: ONS and Bank calculations.
(a) Chained-volume measures. The fan chart depicts an estimated probability distribution for GDP over the past. It can be interpreted in the same way as the fan charts in Section 5.
Minsky’s balance sheets
 Hedged
 Debt can be repaid in full from cashflow
 Speculative
 Interest can be paid from cashflow but
repayment of principal depends on sale of
assets or refinance
 Ponzi
 Payment of interest depends on refinancing
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The balance of payments =
 current account balance
 Exports less imports of goods (trade balance,
NX in the model)
 + exports less imports of services
 + net cross-border investment income
 + net cross-border labour income
 + capital account (net sales of securities to nonresidents less purchases from non-residents)
 = official financing (e.g. forex reserves change)
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National income identity
𝑁𝑋 = −𝑆𝐹 = 𝑆𝐺 + 𝑆𝑃 − 𝐼
𝐼 = 𝑆𝐺 + 𝑆𝑃 + 𝑆𝐹
∆𝐼 = ∆𝑆𝐹
−∆𝑆𝑃 = ∆𝑆𝐹
−∆𝑆𝐺 = ∆𝑆𝐹
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Relative Unit Labour Cost/
international competitiveness
130
120
110
1998 = 100
France
Germany
Greece
100
Italy
Spain
United Kingdom
90
80
70
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: OECD, Economic Outlook, 2013
Source: Eurostat, 2011
Further reading
 Kindleberger, Charles P. (1989, 2/e) Manias,
Panics and Crashes, Basingstoke: Macmillan
 Minsky, Hyman P. (1986) Stabilizing An
Unstable Economy, New York: McGraw Hill
 Cesaratto, Sergio (2013) The implications of
TARGET2 in the European balance of
payments crisis and beyond, European
Journal of Economics and Economic Policies:
Intervention, Vol. 10 No. 3, pp. 359–382
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