This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.

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Deciphering the Liquidity and Credit Crunch 2007-08

Using various methods, the size of the shadow economy in 76 developing, transition, and OECD countries is estimated. Average size varies from 12 percent of GDP for OECD countries, to 23 percent for transition countries and 39 percent for developing countries. Increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy, especially in OECD countries. According to some findings, corruption has a positive impact on the size of the shadow economy, and a growing shadow economy has a negative effect on official GDP growth.

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Shadow Economies: Size, Causes, and Consequences

The crisis of 2008-09 has focused attention on money and credit fluctuations, financial crises, and policy responses. In this paper we study the behavior of money, credit, and macroeconomic indicators over the long run based on a newly constructed historical dataset for 12 developed countries over the years 1870-2008, utilizing the data to study rare events associated with financial crisis episodes. We present new evidence that leverage in the financial sector has increased strongly in the second half of the twentieth century as shown by a decoupling of money and credit aggregates, and we also find a decline in safe assets on banks' balance sheets. We also show for the first time how monetary policy responses to financial crises have been more aggressive post-1945, but how despite these policies the output costs of crises have remained large. Importantly, we can also show that credit growth is a powerful predictor of financial crises, suggesting that such crises are

Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870-2008

Over the last thirty years, a new paradigm in banking theory has overturned economists' traditional vision of the banking sector. The asymmetric information model, extremely powerful in many areas of economic theory, has proven useful in banking theory both for explaining the role of banks in the economy and for pointing out structural weaknesses in the banking sector that may justify government intervention. In the past, banking courses in most doctoral programs in economics, business, or finance focused either on management or monetary issues and their macroeconomic consequences; a microeconomic theory of banking did not exist because the Arrow-Debreu general equilibrium model of complete contingent markets (the standard reference at the time) was unable to explain the role of banks in the economy. This text provides students with a guide to the microeconomic theory of banking that has emerged since then, examining the main issues and offering the necessary tools for understanding how they have been modeled. This second edition covers the recent dramatic developments in academic research on the microeconomics of banking, with a focus on four important topics: the theory of two-sided markets and its implications for the payment card industry; "non-price competition" and its effect on the competition-stability tradeoff and the entry of new banks; the transmission of monetary policy and the effect on the functioning of the credit market of capital requirements for banks; and the theoretical foundations of banking regulation, which have been clarified, although recent developments in risk modeling have not yet led to a significant parallel development of economic modeling. Praise for the first edition:"The book is a major contribution to the literature on the theory of bankingand intermediation. It brings together and synthesizes a broad range ofmaterial in an accessible way. I recommend it to all serious scholars andstudents of the subject. The authors are to be congratulated on a superbachievement." -- Franklin Allen, Nippon Life Professor of Finance and Economics, WhartonSchool, University of Pennsylvania "This book provides the first comprehensive treatment of the microeconomicsof banking. It gives an impressive synthesis of an enormous body ofresearch developed over the last twenty years. It is clearly written and apleasure to read. What I found particularly useful is the great effort thatXavier Freixas and Jean-Charles Rochet have taken to systematicallyintegrate the theory of financial intermediation into classicalmicroeconomics and finance theory. This book is likely to become essentialreading for all graduate students in economics, business, and finance." -- Patrick Bolton, Barbara and David Zalaznick Professor of Business, Columbia University Graduate School of Business "The authors have provided an extremely thorough and up-to-date survey ofmicroeconomic theories of financial intermediation. This work manages to beboth rigorous and pleasant to read. Such a book was long overdue and shouldbe required reading for anybody interested in the economics of banking andfinance." -- Mathias Dewatripont, Professor of Economics, ECARES, Universit

Microeconomics of banking

http://deepblue.lib.umich.edu/bitstream/handle/2027.42/39681/wp297.pdf?sequence=3

Corporate Governance in the Asian Financial Crisis

Incentive conflict in deposit-insurance regulation: evidence from Australia

Deposit Insurance Issues in the Post-2008 Crisis World

The municipal bond auction: reply

Capital in banking: past, present and future

Special Addresses: The (Changing) Role of Central Banks in Financial Stability Policies (Peter Praet) The Role of Central Banks in Financial Stability: How Has It Changed? (Willem H Buiter) Pursuing Financial Stability at the Federal Reserve (Janet L Yellen) The Role of Central Banks in Financial Stability: Historical Review and Critique: Financial Stability: Lessons Learned from the Recent Crisis and Implications for the Federal Reserve (Nellie Liang) Role of Central Banks in Financial Stability: Lessons from the Experience of the Bank of Japan (Takeo Hoshi) Overcoming the Fear of Free Falling: Monetary Policy Graduation in Emerging Markets (Carlos A Vegh and Guillermo Vuletin) Can We Identify the Financial Cycle? (Mathias Drehmann, Claudio Borio and Kostas Tsatsaronis) Central Banks and Asset Price Bubbles: Low Interest Rates and Housing Bubbles: Still No Smoking Gun (Kenneth N Kuttner) Classic FIT and Lean FIT: Is Inflation-Targeting Guilty of Causing the Financial Instability of 2007 - 2009? (Takatoshi Ito) Current, Past, and Potential Future Threats to Financial Stability: Bank Capital Regulations: Learning the Right Lessons from the Crisis (Asli Demirguc-Kunt) International Monetary Reform: Exchange Rates or Interest Rates? (Ronald McKinnon) Threats to Financial Stability in Emerging Markets: The New and Very Active Role of Central Banks (Liliana Rojas-Suarez) The Social Productivity of the Financial Sector: In Defense of Wall Street: The Social Productivity of the Financial System (Ross Levine) Output Growth Variability: The Role of Financial Markets (Alexander Popov) Occupying the Wrong Street? The Social Productivity of the Financial Sector: Some Comments (Gerard Caprio, Jr.) Open Issues in the Regulatory Debate: Failure Resolutions, Bailouts, Moral Hazard, and Market Discipline: Bankers and Brokers First: Loose Ends in the Theory of Central Bank Policymaking (Edward J Kane) The Elusive Scale Economies of the Largest Banks and Their Implications for Global Competitiveness (Joseph P Hughes) The Ex Ante versus Ex Post Effect of Public Guarantees (Evren Damar, Reint Gropp and Adi Mordel) Real and Imaginary Resolution Options for Large Financial Institutions (David A Skeel, Jr.) Policy Panel: Where to from Here?: Is Our Economy's Financial Sector Worth What It Costs Us? (Benjamin M Friedman) The Eurozone Crisis: Causes, Remedy, and Misperceptions (Richard C Koo) Macroprudential and Monetary Policies (Frederic S Mishkin) The Eurozone Crisis (Richard Portes) The Way Forward - Central Banks with Financial Stability Mandates: The Case of the Eurosystem (Anne Sibert).

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George G. Kaufman

Papers

Incentive conflict in deposit-insurance regulation: evidence from Australia

Deposit Insurance Issues in the Post-2008 Crisis World

The municipal bond auction: reply

Capital in banking: past, present and future

The role of central banks in financial stability : how has it changed?