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Types of Bubbles

Fin254f: Spring 2010 Reinhart/Rogoff (1). Types of Bubbles. Outline. Book intro Classifications Some quick examples. Defining Mission. Differences from Kindleberger/Aliber Broader (international macro) perspective More (lots of) data (charts)

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Types of Bubbles

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  1. Fin254f: Spring 2010 Reinhart/Rogoff (1) Types of Bubbles

  2. Outline • Book intro • Classifications • Some quick examples

  3. Defining Mission • Differences from Kindleberger/Aliber • Broader (international macro) perspective • More (lots of) data (charts) • Trying to move on from "narrative" approach

  4. Crises Types • Quantitative thresholds • Inflation crises • Currency crashes • Currency debasement • Asset price bubbles bursting • Events • Banking crises • External debt crises • Domestic debt crises

  5. Inflation Crises • 1 year inflation > 40 percent • These crises much more common in recent history • Average inflation • 1500-1799: 0.50% • 1800-1913: 0.71% • 1914-2006: 5.00%

  6. Currency Crises • Drop of 15% per year • No other variables • Good for post WWII

  7. Currency Debasement • Currency reissue/conversion • Issue new currency • Record (Zimbabwe 10 billion to 1) • Usually after asset pricing bubbles

  8. Bursting of Asset Bubbles • Important, but • Housing and asset prices more difficult to get long term

  9. Banking Crises • Dating difficult • Price of bank stocks? • Changes in deposits? • Asset or liability side? • Events • Bank runs -> closures • Large scale government assistance

  10. External Debt Crises • Default on government debt • Held outside country/foreign legal jurisdiction • Usually in foreign currency • Default date easy • Resolutions difficult

  11. Domestic Debt Crises • Debt issued by government inside country/domestic jurisdiction • Sometimes unnoticed

  12. This Time is Different: Examples • 1920’s • Stable politics/new technologies • Asia 1990’s • Conservative fiscal, stable fx rates, high growth • US 2000’s • Globalization, technology, great financial system, monetary policy, securitized debt

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