A financial crisis is a disturbance to financial markets. associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the marketâ€TMs capacity to allocate capital. In this paper we analyze the generation and propagation of financial crises in an international setting. We provide a perspective on the danger of a serious disruption to the global financial system by comparing the last full-fledged financial crisis - that of the 1930s - with conditions prevailing today. Our definition of a financial crisis implies a distinction between generalized financial crises on the one hand and isolated bank failures, debt defaults and foreign-exchange market disturbances on the other. We represent this distinction in three sets of linkages: between debt defaults; and between exchange-market disturbances and bank failures. In both the 1930s and 1980s, the institutional environment was drastically altered by rapid change in foreign exchange markets, in international capital markets, and in the structure of domestic banking systems. Our comparative analysis underscores the critical role played by institutional arrangements in financial markets as a determinant of the system's vulnerability to destabilizing shocks.

The Anatomy of Financial Crises

https://muse.jhu.edu/journals/international_security/v004/4.3.deese.pdf

Energy: Economics, Politics, and Security

The motivation for my research on CPE macroeconomics has been to elucidate the general problem of macroeconomic equilibrium and, in a specific application, to evaluate the evidence for repressed inflation in the consumption goods markets of the ‘classical’ Soviet-type economies of Eastern Europe. This empirical testing required a more elaborate and general macroeconomics than was then available for the CPEs. A prerequisite was to clarify the appropriate concept of ‘equilibrium’ (see Muellbauer and Portes, 1978, for market economies, and Dlouhy, 1984, in the CPE context). An equilibrium with quantity rationing is a state in which markets do not clear, but the economy is at rest, and we can in principle measure the magnitude of ‘disequilibrium’ in terms of the distance from a market-clearing allocation or price vector. Similarly, Kornai (1980) discusses a self-reproducing equilibrium state of an economy characterized by pervasive shortages which he subsequently seeks to measure (1982).

/pdf/the-theory-and-measurement-of-macroeconomic-disequilibrium-4fcha030pm.pdf

The theory and measurement of macroeconomic disequilibrium in centrally planned economies

Decision modes and international regime change: Western Collaboration on East-West Trade

The responses of East European states to changing international economic opportunities and constraints during the 1973–84 period are examined and contrasted with a sample of newly industrializing countries, including Korea, Taiwan, Singapore, Mexico, Brazil, and Yugoslavia. The effects of external economic shocks and internal policy choices on balance-of-payments difficulties and borrowing requirements in the mid-1970s are assessed. With the exception of Korea, all the countries that chose to borrow heavily at this time, including all of the East European countries, confronted a debt crisis by the early 1980s and were compelled to introduce austerity measures. Economic performance under austerity is compared in terms of the policy instruments different countries used and their effects on output growth, distributional goals, the balance of payments, and debt levels. Long-term effects of the debt crisis on development strategy and economic and political structure are also considered.

The debt crisis and adjustment responses in Eastern Europe: a comparative perspective

A policy analysis of East--West economic interdependence examines the implications that capital export into Eastern Europe has for the new economic order. Although the East European debt is smaller than that of non-OPEC less-developed countries (LDCs), it is significant in the Euromarket. As an oil exporter, Eastern Europe's debts are not the result of oil deficits and must be considered to have different economic, political, and strategic bases. The possibility of requests to treat these debts with the same arrangements negotiated for the LDCs needs to be taken under consideration as economic policy is formulated. Less debt servicing data are available from these centralized countries, making decisions based on default predications more difficult. Debt reduction by the East European countries can only be accomplished by a movement of manufactured goods to the West and a resistance in the West to trade discriminations. The interdependence that has developed should bring Eastern European countries into the discussions of their economic credibility and their involvement in the international monetary system. (DCK)

Richard Portes

Papers

East Europe's debt to the West: interdependence is a two-way street

Debt and the Banks: East Europe's Debt to the West: Interdependence is a Two-Way Street