TY - JOUR
T1 - The run-up to the global financial crisis
T2 - A longer historical view of financial liberalization, capital inflows, and asset bubbles
AU - Roy, Saktinil
AU - Kemme, David M.
N1 - Funding Information:
We gratefully acknowledge helpful comments from Paul McNelis, Ben Bernanke, and two anonymous referees. Earlier drafts of the paper were presented at the annual conference of the Society for Computational Economics in Bordeaux, France, in June 2016, at Athabasca University Collaborative Research Forum Seminar in April 2017, and at the annual meetings of Allied Social Sciences Association in Philadelphia, USA, in January 2018. We acknowledge many useful comments from the session and seminar participants, including Basanta Chaudhuri, Anil Lal, and Sushanta Kumar Mallick. A part of the analysis of this paper was done under the project, “Are banking crises caused by capital flow bonanzas or financial deregulations?” from October 2014–August 2015. The project was financed by the Research Centre of Athabasca University via the Academic Research Fund program. The trips to Bordeaux and Philadelphia were funded by the Research Centre of Athabasca University under the Academic and Professional Development Fund program. We are grateful to the Research Centre of Athabasca University for financial assistance. The usual disclaimer applies.
Publisher Copyright:
© 2019 The Authors
PY - 2020/5
Y1 - 2020/5
N2 - Using forecast error and sensitivity analyses with a vector error correction model for the US economy, we find that the specific exogenous shocks that contributed to the run-up to the global financial crisis of 2007–2009 vary across the three time periods (1980–1988; 1989–1997; and 1998–2006) that are known for distinctive historical events. Deregulation in the 1980s and capital inflows in the early and mid-1990s triggered by the collapse of the European exchange rate mechanism contributed significantly to changes in real house prices. However, capital inflows after the Asian financial crises in 1997 were driven in large part by rising asset prices. Thus, there were interesting changes in the nature of exogenous shocks and directions of causality through the three sub-periods. These results are robust even after controlling for the exogenous global factors partly determining short-run changes in capital flows, asset prices, and per capita real GDP. We conclude that all of the short run changes in response to financial deregulation starting in the 1980s, surges in capital inflows in the early 1990s, and people's expectation of ever-rising asset prices in the late 1990s and early 2000s culminated in the crisis of 2007–2009.
AB - Using forecast error and sensitivity analyses with a vector error correction model for the US economy, we find that the specific exogenous shocks that contributed to the run-up to the global financial crisis of 2007–2009 vary across the three time periods (1980–1988; 1989–1997; and 1998–2006) that are known for distinctive historical events. Deregulation in the 1980s and capital inflows in the early and mid-1990s triggered by the collapse of the European exchange rate mechanism contributed significantly to changes in real house prices. However, capital inflows after the Asian financial crises in 1997 were driven in large part by rising asset prices. Thus, there were interesting changes in the nature of exogenous shocks and directions of causality through the three sub-periods. These results are robust even after controlling for the exogenous global factors partly determining short-run changes in capital flows, asset prices, and per capita real GDP. We conclude that all of the short run changes in response to financial deregulation starting in the 1980s, surges in capital inflows in the early 1990s, and people's expectation of ever-rising asset prices in the late 1990s and early 2000s culminated in the crisis of 2007–2009.
KW - Asset bubbles
KW - Capital flows
KW - Financial crisis
KW - VEC model
UR - http://www.scopus.com/inward/record.url?scp=85076532552&partnerID=8YFLogxK
U2 - 10.1016/j.irfa.2019.101377
DO - 10.1016/j.irfa.2019.101377
M3 - Journal Article
AN - SCOPUS:85076532552
SN - 1057-5219
VL - 69
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
M1 - 101377
ER -