Economics of Financial Markets
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ECON7200
Economics of Financial Markets
Lecture 12
An Overview of Financial Crises
Online Quiz Information
• Questions will be available at 9am and due at 4pm (Brisbane time) on
Tuesday 24/10/23
• Takes at most 2-3 hours to do.
• Submit at anytime within the 7-hour period.
• Cover ALL lectures/tutorials.
• Topic 11 will only be covered in MCQ format.
• Submit using the Blackboard submission link in the Assessment tab.
• Type or handwrite and scan your answer.
• You can submit multiple times, only the final attempt will be marked.
• Make sure your final attempt is before the deadline to avoid late penalty.
• Make sure your submission is successful before closing tab – wait for email receipt.
• Submit well before 4pm, as traffic can be high close to the deadline,
making the submission delayed/unsuccessful.
• Technical error is not a valid reason for extension request.
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Online Quiz Information – Content
• Part A: 25 MCQs, worth 25 marks in total
• Similar to tutorial questions.
• To answer: Just write down the answer, such as 1A; 2B; 3C; 4D, etc.
• Part B: 6 Short-answer/Calculation questions, worth 75 marks in total
• More detailed required than those in the tutorials.
• Will most probably contain calculation/graph drawing, etc.
• Some questions can ask about intuition/application.
• No need to put citation if you include research to help your arguments.
• Main thing to do: EVERYTHING the questions ask you to do
• Review UQ Extend/Lecture Notes/Tutorials
Central Bank Report
• Due: 4:00pm (Brisbane time) Tuesday 07/11/23
• Strict upper word limit: 1700 words
• Task: Choose a Central Bank
1. Assess its activities in the past 10 years.
2. Choose an economic crisis, and explain the CB’s response.
3. Evaluate its effectiveness before, during, and after event.
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Central Bank Report
Note:
• The economic crisis in question does not need to be within 10 years
• Asian financial crisis, dot-com bubble, GFC, etc.
• Can extend the time in Task 1 to 15 years if you want to be consistent
• No need for econometric analysis
• You might need to present data/figures/tables/articles
• Feel free to use the table/figure from another article, but cite the source!
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Tips – Central Bank Report
• Make use of your Essay feedbacks.
• Look at our marking rubric. It is what we expect from you!
• Must use data & research articles!
• Reference: very important, make sure it’s adequate & correct!
• Key words: Assess & Evaluate
• Give both sides of the argument, with research/data support
• Provide your own conclusion/judgement
Learning Objectives
• We study about financial crises and its dynamics.
• We explore the structure and process of securitization and the shadow
banking system.
• We examine the historical facts about the Global Financial Crisis 2007 –
2009 and European Sovereign Debt Crisis.
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UQ Extend – What is a Financial Crisis?
• A financial crisis occurs when there is a particularly large disruption to
information flows in financial markets, with the result that financial
frictions increase sharply, and financial markets stop functioning.
• The Mother of All Financial Crises: The Great Depression
• This event was brought on by:
• Stock market crash
• Bank panics
• Continuing decline in stock prices
• Debt deflation
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UQ Extend – Dynamics of Financial Crises
• Stage One: Initiation of a Financial Crisis
• Credit Boom and Bust: Mismanagement of financial liberalization/innovation
leading to asset price boom and bust
• Asset-price Bubbles and Bursts
• Increase in Uncertainty
• Stage two: Banking Crisis
• Stage three: Debt Deflation
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Debt Deflation
• Substantial unexpected decline in the price level, while debt payments are
contractually fixed in nominal terms.
• The burden of the debt increases.
• Meanwhile, the asset real value does not change Lower net worth.
• Example:
• Suppose that a firm has $100 million of assets and $90 million of long-term liabilities
in 2016 dollars.
• The net worth is $10 million.
• If the price level falls by 10% in 2017, the real value of the liabilities would rise to $99
million in 2016 dollars. ($1 in 2017 Value = $1.1 in 2016 Value)
• Then real net worth in 2016 dollars would fall from $10 million to $1 million.
• Increased adverse selection and moral hazard problems.