1. Jeffrey Frankel Harpel Professor of Capital Formation & Growth Economic Crisis & Recovery Senior Executive Fellows May 3, 2010

2. 2 The US recession Forecasts Origins of the financial crisis Policy response: How did we avoid a Great Depression? Intellectual implications of the crisis for the field of economics Appendices The global economy The problem of global imbalances The G-20 in 2010 Topics

3. 3 The US Recession The US recession started in Dec. 2007 according to the NBER Business Cycle Dating Committee. The US recession started in Dec. 2007 according to the NBER Business Cycle Dating Committee. In May 2009, the recession’s length passed the postwar records -- 1973-75 & 1981-82 In May 2009, the recession’s length passed the postwar records -- 1973-75 & 1981-82 = 16 months = 16 months One has to go back to 1929-33 for a longer downturn. One has to go back to 1929-33 for a longer downturn. Also the most severe, by most measures: Also the most severe, by most measures: rise in unemployment rate, job loss, output loss…. rise in unemployment rate, job loss, output loss….

4. 4 BUSINESS CYCLE REFERENCE DATES Source: NBER Source: NBER PeakTroughContraction Quarterly dates are in parentheses Peak to Trough August 1929 (III) May 1937 (II) February 1945 (I) November 1948 (IV) July 1953 (II) August 1957 (III) April 1960 (II) December 1969 (IV) November 1973 (IV) January 1980 (I) July 1981 (III) July 1990 (III) March 2001 (I) December 2007 (IV) March 1933 (I) June 1938 (II) October 1945 (IV) October 1949 (IV) May 1954 (II) April 1958 (II) February 1961 (I) November 1970 (IV) March 1975 (I) July 1980 (III) November 1982 (IV) March 1991 (I) November 20011 (IV) 43 months 13 8 11 10 8 10 11 16 6 16 8 8 Average, all cycles: 1854-2001 (32 cycles) 1945-2001 (10 cycles) 17 10 June 2009 (II) or later > 18 months [not yet declared]

5. 5 US employment peaked in Dec. 2007, which is one reason why the NBER BCDC dated the peak from that month. 8 million jobs were lost over the next two years. Payroll employment series Source: Bureau of Labor Statistics Payroll employment series Source: Bureau of Labor Statistics, April 2010 Jobs peak Jobs trough

6. US employment fell fully in proportion to GDP, unlike the “labor hoarding” pattern of the past.

7. In Germany, by contrast, the recession has shown up only in GDP, not at all in employment.

8. Until the end of 2009, the US recovery depended on inventories and did not show up in employment. Source: IMF WEO, April 2010 The 2007-09, recession was unusual in the size of job loss, and in financial markets’ liquidity crisis.

9. 9 Most indicators began to improve in mid or late 2009 Interbank spreads Interbank spreads Output Output Stock market Stock market Consumer confidence & spending Consumer confidence & spending Even housing measures have bottomed out. Even housing measures have bottomed out. The labor market has been terrible. The labor market has been terrible. But even it has responded with lags no worse than usual. But even it has responded with lags no worse than usual.

10. 10 OECD Econ.Outlook, April 2010 Evidence that the banking sector returned to normal by late 2009. Start of US sub-prime mortgage crisis Lehman failure

11. 11 OECD Economic Outlook, April 2010 Evidence that the banking sector returned to normal in late 2009.

12. % % Corporate bond rates have come back down too. OECD Economic Outlook, April 2010 Now < interest rates in the (mild) 2001 recession.

13. Source: Jeff Frankel’s blog, Nov. 2009 But the usual cyclical pattern of recovery began in 2009, Q II: 1. Leading indicators come first. 2. Output indicators come next. 3. Labor market indicators come last. The economic roller coaster went into free-fall in the 3 rd quarter of 2008.

14. 14 Employment Lags Behind GDP Although U.S. job loss has been especially bad in this recession, the recovery lag behind GDP has not been unusual. Recession of Mar. 2001 – Nov. 2001 Recession of Dec. 2007 – ?

15. 15 Total hours worked in the US economy (an indicator that does not lag as far behind as unemployment) began to turn upward in October 2009 Source: New series from BLS covering the entire private economy. 4/8/2010

16. 16 Danger of a W-shaped recession? Demand growth in the 2 nd half of 2009 came in large part from: Demand growth in the 2 nd half of 2009 came in large part from: fiscal stimulus, & fiscal stimulus, & ending of firms’ inventory disinvestment. ending of firms’ inventory disinvestment. Both sources of stimulus are running down in 2010. Both sources of stimulus are running down in 2010. Fortunately it looks like consumption & investment may be catching fire: Fortunately it looks like consumption & investment may be catching fire: Friday’s GDP report from BEA (4/30/10). Friday’s GDP report from BEA (4/30/10). QIII-QI: 2.2% 5.6% 3.2.%, now led by consumption. QIII-QI: 2.2% 5.6% 3.2.%, now led by consumption. There could always be new shocks: There could always be new shocks: An Iceland or Dubai or Greece An Iceland or Dubai or Greece Hard landing for the $ Hard landing for the $ Geopolitical/oil shock… Geopolitical/oil shock… I now put the odds of a double dip recession as I now put the odds of a double dip recession as rather small, but rather small, but big enough to have persuaded the NBER BCDC in our April 8 meeting to wait longer before declaring the 2009 trough. big enough to have persuaded the NBER BCDC in our April 8 meeting to wait longer before declaring the 2009 trough.

17. Four leading private forecasts of growth in 2010 Mussa, PIIE, April Economist average, March Consensus average, March Blue Chip average, March U.S.4.03.1 Japan2.71.71.51.8 Euro area 2.01.21.11.3 UK2.01.31.41.2 Source: Michael Mussa, Global Economic Prospects for 2010 and 2011, PIIE, April 8, 2010.

18. International Monetary Fund | April 14, 2010 Table 1.1. World Economic Outlook (%) Year over Year Q4 over Q4 (2010-2011 are projections) 2008 2009 2010 2011 2009 2010 2011 World Output3.0 –0.6 4.2 4.3 1.7 3.9 4.5 Advanced Economies 0.5 –3.2 2.3 2.4 –0.5 2.2 2.5 Japan –1.2 –5.2 1.9 2.0–1.4 1.6 2.3 United States 0.4 –2.4 3.1 2.6 0.1 2.8 2.4 Euro Area 0.6 –4.1 1.0 1.5 –2.2 1.2 1.8 Newly Industrialized Asian Economies 1.8 –0.9 5.2 4.9 6.1 3.4 5.9

19. Emerging & Devel- 6.1 2.4 6.3 6.5 5.2 6.3 7.3 oping Economies Central & E.Europe 3.0 –3.7 2.8 3.4 1.9 1.3 4.1 Russia 5.6 –7.9 4.0 3.3 –3.8 1.7 4.2 Developing Asia 7.9 6.6 8.7 8.7 8.6 8.9 9.1 China 9.6 8.7 10.0 9.9 10.7 9.4 10.1 India 7.3 5.7 8.8 8.4 6.0 10.9 8.2 ASEAN-54.7 1.7 5.4 5.6 5.0 4.2 6.2 Middle East & N.Africa 5.1 2.4 4.5 4.8......... Sub-Saharan Africa 5.5 2.1 4.7 5.9......... Western Hemisphere 4.3 –1.8 4.0 4.0......... Brazil 5.1 –0.2 5.5 4.1 4.3 4.2 4.2 Mexico 1.5 –6.5 4.2 4.5 –2.4 2.3 5.5 Year over Year Q4 over Q4 (2010-2011 are projections) 2008 2009 2010 2011 2009 2010 2011

20. 20 Soon we must return toward fiscal discipline. The only way to do this is both reduce spending & raise tax revenue, as we did in the 1990s. The only way to do this is both reduce spending & raise tax revenue, as we did in the 1990s. Tax revenue Tax revenue Let President Bush’s tax cuts for the rich expire in 2011. Let President Bush’s tax cuts for the rich expire in 2011. Phase in carbon tax or auctioning tradable emission permits Phase in carbon tax or auctioning tradable emission permits Or introduce a Value Added Tax Or introduce a Value Added Tax Curtail expensive and distorting tax expenditures Curtail expensive and distorting tax expenditures E.g., Tax-deductibility of mortgage interest E.g., Tax-deductibility of mortgage interest All politically very difficult, needless to say. All politically very difficult, needless to say. Any solution requires: Any solution requires: Honest budgeting (i.e., war in Iraq goes on-budget) Honest budgeting (i.e., war in Iraq goes on-budget) PAYGO PAYGO Wise up to politicians who claim they want to do it entirely on the spending side & but who raise spending when they get the chance. Wise up to politicians who claim they want to do it entirely on the spending side & but who raise spending when they get the chance.

21. 21 Spending Spending Cuts in farm subsidies for agribusiness & farmers Cuts in farm subsidies for agribusiness & farmers Cut unwanted weapons systems (a rare success: the F22 fighter) Cut unwanted weapons systems (a rare success: the F22 fighter) Cut manned space program… Cut manned space program… Social security Social security Raise retirement age – just a little Raise retirement age – just a little Progressively index future benefit growth to inflation Progressively index future benefit growth to inflation If necessary, raise the cap on social security taxes. If necessary, raise the cap on social security taxes. Health care Health care Encourage hospitals to standardize around best-practice medicine Encourage hospitals to standardize around best-practice medicine to pursue the checklist that minimizes patient infections and to pursue the checklist that minimizes patient infections and to avoid unnecessary medical tests & procedures. to avoid unnecessary medical tests & procedures. Lever: making Medicare payments conditional on these best practices. Lever: making Medicare payments conditional on these best practices. Curtail corporate tax-deductibility of health insurance, Curtail corporate tax-deductibility of health insurance, especially gold-plated. especially gold-plated.

22. When will US adopt the tough measures to get back to fiscal sustainability? Ideally, we would now adopt measures that would begin to go into effect in 2011-12 and over the coming decades – repeating the 1990s success. That is unlikely politically, partisan gridlock. Hopefully, then, after the 2012 presidential elections. Otherwise, in response to future crises, when it will be much more painful !

23. More on the crisis of 2007-2009 1. Six root causes of the financial crisis 2. Policy response: How did we avoid a Great Depression? 3. Implications for the field of economics

24. 24 Six root causes of the financial crisis 1. US corporate governance falls short E.g., rating agencies; E.g., rating agencies; executive compensation … executive compensation … options; options; golden parachutes… golden parachutes… 2. US households save too little, borrow too much. 3. Politicians slant excessively toward homeowner debt: Tax-deductible mortgage interest; Tax-deductible mortgage interest; F annie M ae & Freddie Mac ; F annie M ae & Freddie Mac ; Allowing teasers, no-equity, NINJA loans, liar loans… Allowing teasers, no-equity, NINJA loans, liar loans… MSN Money & Forbes

25. 25 Six root causes of financial crisis, cont. 4. The federal budget has been on a reckless path since 2001, reminiscent of 1981-1990 reminiscent of 1981-1990 5. Monetary policy was too loose during 2004-05, accommodating fiscal expansion, reminiscent of the Vietnam era. accommodating fiscal expansion, reminiscent of the Vietnam era. 6. Financial market participants grossly underpriced risk 2005-07. Ignoring possible shocks such as: Ignoring possible shocks such as: housing crash, housing crash, $ crash, $ crash, oil prices, oil prices, geopolitics…. geopolitics….

26. 26 US real interest rate < 0, 2003-04 Real interest rates <0 Source: Benn Steil, CFR, March 2009

27. 27 In 2003-07, market-perceived volatility, as measured by options (VIX), plummeted. So did spreads on US junk & emerging market bonds. In 2008, it all reversed. Source: “The EMBI in the Global Village,” Javier Gomez May 18, 2008 juanpablofernandez.wordpress.com/2008/05/juanpablofernandez.wordpress.com/2008/05/

28. 28 Monetary policy easy 2004-05 Federal budget deficits Underestimated risk in financial mkts Failures of corporate governance Households saving too little, borrowing too much Excessive leverage in financial institutions Stock market bubble Housin g bubble Stock market crash Housin g crash Financial crisis 2007-08 China’s growth Low national saving Lower long- term econ.growth Eventual loss of US hegemony Recession 2008-09 Oil price spike 2007-08 Gulf insta- bility Foreig n debt Origins of the financial/economic crises Excessive complexity CDSs MBS s CDO s Predatory lending Homeownership bias

29. 29 They did. Indices peaked in late 2006, and fell 1/3. The “black swan”: investors thought housing prices could never go down.

30. 30 Financial meltdown: bank spreads rose sharply when sub-prime mortgage crisis hit (Aug. 2007) and up again when Lehman crisis hit (Sept. 2008). Source: OECD Economic Outlook (Nov. 2008).

31. 31 My favorite monthly indicator: total hours worked in the economy It confirms: US recession began Dec. 07, turned severe in Sept. 08, when the worst of the financial crisis hit (Lehman bankruptcy…)

32. 32 National income has been more reliable than GDP, even though they are supposed to measure the same thing. Recession of July 1990 – March 91 Recession of Mar. 2001 – Nov. 2001 Recession of Dec. 2007 – ?

33. 33 2: Policy Response -- How did we avoid another Great Depression? We learned important lessons from the 1930s and, for the most part, didn’t repeat the mistakes we made then. We learned important lessons from the 1930s and, for the most part, didn’t repeat the mistakes we made then.

34. 34 We learnt from the mistakes of the 1930s. We learnt from the mistakes of the 1930s. Monetary response: good this time Monetary response: good this time Fiscal response: relatively good, but : Fiscal response: relatively good, but : constrained by inherited debt constrained by inherited debt and congressional politics. and congressional politics. Trade policy: Trade policy: Some slippage, e.g., Chinese tires. Some slippage, e.g., Chinese tires. But we did not repeat 1981 auto quotas or 2001 steel tariffs But we did not repeat 1981 auto quotas or 2001 steel tariffs let alone Smoot-Hawley ! let alone Smoot-Hawley ! Financial regulation? Financial regulation?

35. 35 U.S. Policy Responses Monetary easing was unprecedented, appropriately avoiding the mistake of 1930s. (graph) Monetary easing was unprecedented, appropriately avoiding the mistake of 1930s. (graph) Policy interest rates ≈ 0. Policy interest rates ≈ 0. The famous liquidity trip is not mythical after all. The famous liquidity trip is not mythical after all. Lending, even inter-bank, built in big spreads. Lending, even inter-bank, built in big spreads. Then we had aggressive quantitative easing: Then we had aggressive quantitative easing: the Fed purchased assets not previously dreamt of. the Fed purchased assets not previously dreamt of.

36. 36 The Fed certainly did not repeated the mistake of 1930s: letting the money supply fall. Source: IMF, WEO, April 2009 Box 3.1 1930s 2008-09

37. 37 Federal Reserve Assets ($ billions) have more-than-doubled, through new facilities, rather than conventional T bill purchases Source: Federal Reserve H.4.1 report

38. 38 Policy Responses, continued succeeded in getting the financial system going again, succeeded in getting the financial system going again, thereby precluding a new Great Depression, thereby precluding a new Great Depression, yet without “nationalization” of the banks. yet without “nationalization” of the banks. Contrary to almost all commentary at the time of TARP: Contrary to almost all commentary at the time of TARP: The conditions imposed on banks were enough to make them balk at keeping the funds. The conditions imposed on banks were enough to make them balk at keeping the funds. The banks have now paid back the taxpayer at a profit. The banks have now paid back the taxpayer at a profit. Geithner’s stress tests fulfilled their function of telling strong banks from weak. Geithner’s stress tests fulfilled their function of telling strong banks from weak. The policy of “financial repair”

39. 39 Next up in US: Financial reform. What is needed? Next up in US: Financial reform. What is needed? Lending Lending Mortgages Mortgages Consumer protection, including standards for mortgage brokers Consumer protection, including standards for mortgage brokers Fix “originate to distribute” model, so lenders stay on the hook. Fix “originate to distribute” model, so lenders stay on the hook. Remove pro-housing bias in policy. (But politicians remain unanimously pro.) Remove pro-housing bias in policy. (But politicians remain unanimously pro.) Banks: Banks: Regulators shouldn’t let banks use their own risk models ; Regulators shouldn’t let banks use their own risk models ; should make capital requirements higher & less pro-cyclical. should make capital requirements higher & less pro-cyclical. Is “too big to fail” inevitable? (The worst is to say “no” and then do “yes.”) Is “too big to fail” inevitable? (The worst is to say “no” and then do “yes.”) Extend bank-like regulation to “near banks.” Extend bank-like regulation to “near banks.” Regulators need resolution authority. Regulators need resolution authority. Segmentation of function: Segmentation of function: Volcker rule ? Volcker rule ? or all the way back to Glass-Steagall or breaking up large banks? (I don’t think so.) or all the way back to Glass-Steagall or breaking up large banks? (I don’t think so.)

40. 40 Financial reforms continued Financial reforms continued Executive compensation Executive compensation Compensation committee not under CEO. Compensation committee not under CEO. Maybe need Chairman of Board. Maybe need Chairman of Board. Discourage golden parachutes & options, Discourage golden parachutes & options, unless truly tied to performance. unless truly tied to performance. Securities Securities Regulatory agencies: less decentalization of authority ? Regulatory agencies: less decentalization of authority ? Regulate derivatives: Regulate derivatives: Create a central clearing house for CDSs. Create a central clearing house for CDSs. Credit ratings: Credit ratings: Reduce reliance on ratings: AAA does not mean no risk. Reduce reliance on ratings: AAA does not mean no risk. Reduce ratings agencies’ conflicts of interest. Reduce ratings agencies’ conflicts of interest.

41. 41 Policy Responses, continued $787 b fiscal stimulus passed Feb. 2009. $787 b fiscal stimulus passed Feb. 2009. Good old-fashioned Keynesian stimulus Good old-fashioned Keynesian stimulus Even the principle that spending provides more stimulus than tax cuts has returned; Even the principle that spending provides more stimulus than tax cuts has returned; not just from Larry Summers, e.g., not just from Larry Summers, e.g., but also from Martin Feldstein. but also from Martin Feldstein. Is $800 billion too small? Too large? Is $800 billion too small? Too large? Yes: Too small to knock out recession ; Yes: Too small to knock out recession ; too large to reassure global investors re US debt. too large to reassure global investors re US debt. Also Congress was not willing to vote for more, especially on the spending side. Also Congress was not willing to vote for more, especially on the spending side.

42. 42 Bottom line of macroeconomic policy response: The monetary and fiscal response was sufficient to halt the economic free-fall. The monetary and fiscal response was sufficient to halt the economic free-fall. It won’t be enough to return us rapidly to full employment and potential output. It won’t be enough to return us rapidly to full employment and potential output. Given the path of debt that was inherited in 2009, it is unlikely that more could be done. Given the path of debt that was inherited in 2009, it is unlikely that more could be done. Chinese officials already questioning our creditworthiness Chinese officials already questioning our creditworthiness Questions asked about US AAA rating Questions asked about US AAA rating Risk of hard landing for the $ Risk of hard landing for the $

43. 43 3: Intellectual implications of the crisis for economics The return of Keynes The return of Keynes And 4 others who mainstream theory had forgotten. And 4 others who mainstream theory had forgotten. The implications for Inflation Targeting The implications for Inflation Targeting 8 economists who got parts right 8 economists who got parts right In what direction should macro theory now move? In what direction should macro theory now move? The phyloxera analogy: reimporting models from emerging markets. The phyloxera analogy: reimporting models from emerging markets.

44. 44 The return of Keynes Keynesian truths abound today : Keynesian truths abound today : Origins of the crisis Origins of the crisis The Liquidity Trap The Liquidity Trap Fiscal response; spending vs. tax cuts Fiscal response; spending vs. tax cuts Motivation for macroeconomic intervention: to save market microeconomics Motivation for macroeconomic intervention: to save market microeconomics International transmission International transmission Need for coordinated expansion (now the G20) Need for coordinated expansion (now the G20)

45. 45 Motivation for macroeconomic intervention The view that Keynes stood for big government is not really right. The view that Keynes stood for big government is not really right. He wanted to save market microeconomics from central planning, which had allure in the 30s & 40s, He wanted to save market microeconomics from central planning, which had allure in the 30s & 40s, by using macroeconomic demand to return to equilibrium. by using macroeconomic demand to return to equilibrium. Some on the Left reacted to the 2008 crisis & election by hoping for fundamental overhaul of the economic system. Some on the Left reacted to the 2008 crisis & election by hoping for fundamental overhaul of the economic system. But the policy that prevails today is the same. But the policy that prevails today is the same.

46. 46 The origin of the crisis was an asset bubble collapse, loss of confidence, credit crunch…. The origin of the crisis was an asset bubble collapse, loss of confidence, credit crunch…. like Keynes’ animal spirits or beauty contest. like Keynes’ animal spirits or beauty contest. Add in von Hayek’s credit cycle, Add in von Hayek’s credit cycle, Kindleberger 78 ’s “manias & panics” Kindleberger 78 ’s “manias & panics” the “Minsky moment,” the “Minsky moment,” & Fisher’s “debt deflation.” & Fisher’s “debt deflation.” The origin this time was not a monetary contraction in response to inflation as were 1980-82 or 1991. The origin this time was not a monetary contraction in response to inflation as were 1980-82 or 1991. But, rather, a credit cycle: 2003-04 monetary expansion showed up only in asset prices. But, rather, a credit cycle: 2003-04 monetary expansion showed up only in asset prices.

47. 47 Who got pieces of it right, beforehand? Krugman: If a Depression can happen in Japan, it can happen in any modern economy. Krugman: If a Depression can happen in Japan, it can happen in any modern economy. Rajan: Failures of corporate governance. Rajan: Failures of corporate governance. BIS (Borio & White): Too-easy credit, via asset prices, leads to crises -- with no inflation in between. BIS (Borio & White): Too-easy credit, via asset prices, leads to crises -- with no inflation in between. Shiller: US housing price bubble. Shiller: US housing price bubble. Gramlich: Homeowners are being sold mortgages that they can’t repay. Gramlich: Homeowners are being sold mortgages that they can’t repay. Rogoff: “This Time Is Not Different.” Rogoff: “This Time Is Not Different.” Roubini: The recession will be severe. Roubini: The recession will be severe.

48. 48 Appendix: “Where should mainstream macro go, in light of the 2007-09 global financial crisis ?” Some models that had been thriving in an emerging markets context may now help answer this question. Some models that had been thriving in an emerging markets context may now help answer this question. Some were applications of models originally designed for advanced-country financial markets, but never fully incorporated into the mainstream macro core. Some were applications of models originally designed for advanced-country financial markets, but never fully incorporated into the mainstream macro core. A possible explanation why they had been transplanted to emerging markets: assumptions of imperfections in financial markets were considered more acceptable there, than in the context of advanced economies. A possible explanation why they had been transplanted to emerging markets: assumptions of imperfections in financial markets were considered more acceptable there, than in the context of advanced economies.

49. 49 Financial crises: Not just for emerging markets anymore. An analogy In the latter part of the 19th century most of the vineyards of France were destroyed by Phylloxera. In the latter part of the 19th century most of the vineyards of France were destroyed by Phylloxera. Eventually a desperate last resort was tried: grafting susceptible European vines onto resistant American root stock. Eventually a desperate last resort was tried: grafting susceptible European vines onto resistant American root stock. Purist French vintners initially disdained what the considered compromising the refined tastes of their grape varieties. Purist French vintners initially disdained what the considered compromising the refined tastes of their grape varieties. But it saved the European vineyards, and did not impair the quality of the wine. But it saved the European vineyards, and did not impair the quality of the wine. The New World had come to the rescue of the Old. The New World had come to the rescue of the Old.

50. 50 Implications of the 2008 financial crisis for macroeconomics? In 2007-08, the global financial system was grievously infected by “toxic assets” originating in the United States. In 2007-08, the global financial system was grievously infected by “toxic assets” originating in the United States. Many ask what fundamental rethinking is necessary to save orthodox macroeconomic theory. Many ask what fundamental rethinking is necessary to save orthodox macroeconomic theory. Some answers may lie with models that have been applied to the realities of emerging markets. Some answers may lie with models that have been applied to the realities of emerging markets. Purists may be reluctant to seek help from this direction. Purists may be reluctant to seek help from this direction. But they should not fear that the hardy root stock of emerging market models is incompatible with fine taste. But they should not fear that the hardy root stock of emerging market models is incompatible with fine taste.

51. 51 What are some of these models? Asymmetric information (Akerlof…) Asymmetric information (Akerlof…) Credit rationing (Stiglitz…) Credit rationing (Stiglitz…) Need for collateral (Kiyotaki & Moore, Caballero…) Need for collateral (Kiyotaki & Moore, Caballero…) Leverage cycle (Geanakoplos) Leverage cycle (Geanakoplos) The credit channel (Bernanke & Gertler… ) The credit channel (Bernanke & Gertler… ) Speculative attacks (Krugman) Speculative attacks (Krugman) Bank runs (Diamond & Dybvyg) Bank runs (Diamond & Dybvyg) Multiple equilibria ( Obstfeld; Morris & Shin; …) Multiple equilibria ( Obstfeld; Morris & Shin; …) Balance sheet effects & sudden stops (Calvo, Velasco…) Balance sheet effects & sudden stops (Calvo, Velasco…) Moral hazard & incentive incompatibility (Dooley…) Moral hazard & incentive incompatibility (Dooley…) Behavioural economics (Thaler..) Behavioural economics (Thaler..)