NEW YORK UNIVERSITY Stern School of Business. Corporate Finance and Financial Crises B Franklin Allen Spring Semester 2002

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1 NEW YORK UNIVERSITY Stern School of Business Corporate Finance and Financial Crises B Franklin Allen Spring Semester 2002 Introduction Classes will be held on Mondays 1:30-4:20pm in 5-80 KMEC. Office Hours are 2:00-3:30pm on Tuesdays and by appointment. Contact details for Franklin Allen: I can be reached at any time through allenf@wharton.upenn.edu Most weeks I will be in my office 9-06 Tisch Hall from Mondays through Thursdays. My telephone number in the office is Grading will be done on the basis of a presentation and a paper. Outline of Classes January 28 Section 1 Introduction February 4 Section 2 Historical and Recent Crises February 11 Section 3 Banking Crises February 25 March 4 Section 4 Currency Crises March 18 March 25 Section 5 Bubbles and Crises April 1 April 8 Section 6 Financial Fragility April 15 Section 7 Contagion April 22 Section 8 The Role of Bankruptcy April 29 Section 9 Government and Crises 1

2 Section 2: Historical and Recent Crises Brief Bibliography Bordo, M. (1986). Financial Crises, Banking Crises, Stock Market Crashes and the Money Supply: Some International Evidence, Bordo, M., B. Eichengreen, D. Klingeiel and M. Martinez-Peria (2000). Is the Crisis Problem Growing More Severe? working paper, University of California, Berkeley. Kindleberger, C. (1991). A Financial History of Western Europe (second edition), New York: Oxford University Press. Wilson, J., R. Sylla and C. Jones (1990). Financial Market Panics and Volatility in the Long Run, in Crashes and Panics edited by E. White, Illinois: Dow- Jones Irwin, Section 3: Banking Crises Allen, F. and D. Gale. Optimal Financial Crises, Journal of Finance 53, Diamond, D. W. and P. Dybvig (1983). Bank Runs, Deposit Insurance, and Liquidity, Journal of Political Economy 91, Gorton, G. (1988). Banking Panics and Business Cycles, Oxford Economic Papers 40, Jacklin, C. (1987). Demand Deposits, Trading Restrictions, and Risk Sharing, in E. Prescott and N. Wallace, eds., Contractual Arrangements for Intertemporal Trade, University of Minnesota Press, Minneapolis, MN. Kindleberger, C. P. (1978). Manias, Panics, and Crashes: A History of Financial Crises, New York: Basic Books. Mitchell, W. C. (1941). Business Cycles and Their Causes, Berkeley: University of California Press. Morris, S. and H. Shin (1998). Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks, American Economic Review 88, Section 4: Currency Crises Allen, F. and D. Gale (2000). Optimal Currency Crises, Carnegie-Rochester Series on Public Policy (December 2000). 2

3 Chang, R. and A. Velasco (1998a). Financial Fragility and the Exchange Rate Regime, working paper, New York University. Chang, R. and A. Velasco (1998b). Financial Crises in Emerging Markets: A Canonical Model, working paper, New York University. Chari, V. and P. Kehoe, (1999). \QTR{it}{Asking the Right Questions About the IMF}, Federal Reserve Bank of Minneapolis, 1998 Annual Report, Volume 13, May Feldstein, M. (1998). Refocusing the IMF, Foreign Affairs 77(March/April), Fischer, S. (1999). On the Need for an International Lender of Last Resort, working paper, International Monetary Fund. Friedman, M. (1998). Markets to the Rescue, The Wall Street Journal, October 13. Gorton, G. (1988). Banking Panics and Business Cycles, Oxford Economic Papers 40, Kaminsky, G. and C. Reinhart (1999). The Twin Crises: The Causes of Banking and Balance-of-Payments Problems, American Economic Review 89, Krugman, P. (1979). A Model of Balance-of-Payments Crises, Journal of Money Credit and Banking 11, Krugman, P. (1998). The Indispensable IMF, The New York Times, May 15. Morris, S. and H. Shin (1998). Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks, American Economic Review 88, Obstfeld, M. (1994). The Logic of Currency Crises, Cahiers Economiques et Monetaires, Bank of France 43, Sachs, J. (1995). Do We Need an International Lender of Last Resort?'' Lecture delivered at Princeton University, Princeton, N.J., April 20. Schwartz, A. (1998). Time to Terminate the ESF and IMF, working paper, New York University. Section 5: Bubbles and Crises Allen, F. and D. Gale (1999). Bubbles, Crises and Policy, Oxford Review of Economic Policy, 15, Allen, F. and D. Gale (2000). Bubbles and Crises, Economic Journal 110,

4 Allen, F. and Gorton, G. (1993). Churning Bubbles, Review of Economic Studies 60, Higgins, M. and Osler, C. (1997). Asset Market Hangovers and Economic Growth: The OECD During , Oxford Review of Economic Policy 13, Holmstrom, B. and Tirole, J. (1997). Financial Intermediation, Loanable Funds, and the Real Sector, Quarterly Journal of Economics, 112, Kaminsky, G. and Reinhart, C. (1996). Banking and Balance-of-Payments Crises: Models and Evidence, Working paper, Board of Governors of the Federal Reserve, Washington, D.C. Kaminsky, G. and C. Reinhart (1999). The Twin Crises: The Causes of Banking and Balance-of-Payments Problems, American Economic Review 89, Kindleberger, C., (1978). Manias, Panics, and Crashes: A History of Financial Crises, Basic Books, New York, NY. Section 6: Financial Fragility Allen, F. and D. Gale (2001). Financial Fragility, Wharton Financial Institutions Center Working Paper Chari, V. and P. Kehoe (2000). Financial Crises as Herds, working paper, Federal Reserve Bank of Minneapolis. Lagunoff, R. and S. Schreft (1998). A Model of Financial Fragility, forthcoming, Journal of Economic Theory. Section 7: Contagion Allen, F. and D. Gale (2000). Financial Contagion, Journal of Political Economy 108, Calvo, G. (1999). Contagion in Emerging Markets: When Wall Street is a Carrier, Unpublished manuscript, University of Maryland. Freixas, X. and B. Parigi (1998). Contagion and Efficiency in Gross and Net Interbank Payment Systems, Journal of Financial Intermediation 7, Freixas, X. and B. Parigi and J. Rochet (2000). Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank, Journal of Money, Credit and Banking 32,

5 King, M. and S. Wadhwani (1990). Transmission of Volatility Between Stock Markets, Review of Financial Studies 3, Kiyotaki, N. and J. Moore (1998). Credit Chains, working paper, London School of Economics, Department of Economics. Kodres L. and M. Pritsker (2000), A Rational Expectations Model of Financial Contagion, working paper, International Monetary Fund. Krugman, P. (1998), Bubble, Boom, Crash: Theoretical Notes on Asia's Crisis, working paper, MIT, Cambridge, Massachussetts. Kyle, A. and W. Xiong (1999). Contagion as a Wealth Effect of Financial Intermediaries, working paper, Duke University, Durham, N.C. McKinnon, R. and Pill, H. (1997), Credible Economic Liberalizations and Overborrowing, American Economic Review 87, Rochet, J. and J. Tirole (1996a). Interbank Lending and Systemic Risk, Journal of Money, Credit and Banking 28, Rochet, J. and J. Tirole (1996). Controlling Risk in Payment Systems, Journal of Money, Credit and Banking 28, Yuan, K. (2000). Asymmetric Price Movements and Borrowing Constraints: A Rational Expectations Equilibrium Model of Crisis, Contagion, and Confusion, working paper, Department of Economics, MIT. Section 8: The Role of Bankruptcy Allen, F. and R. Herring (2001). Banking Regulation versus Securities Market Regulation, Wharton Financial Institutions Center Working Paper Section 9: Government and Financial Crises Krugman, P. (1998), Bubble, Boom, Crash: Theoretical Notes on Asia's Crisis, working paper, MIT, Cambridge, Massachussetts. McKinnon, R. and Pill, H. (1997), Credible Economic Liberalizations and Overborrowing, American Economic Review 87,