Sovereign Balance Sheets & the Financial Crisis

“The Global Financial Crisis and Great Recession: Causes & Consequences”

Claes Berg (2011), “The Global Financial Crisis and Great Recession: Causes and Consequences“.

Useful speech by Claes Berg of the Sveriges Riksbank.

Looks at consequence of the financial crisis on monetary policy in general and inflation targeting in particular. Suggests flexible inflation targeting, where average interest rate (rather than the policy rate) satisfies target criterion, in response to crisis. Also incorporate credit spreads and their expected persistence in target forecast. Can incorporate measures of financial system leverage if interested in preventing future crises.

Consider implications in terms of financial stability policy. Particular focus on use of Contingent Claims Analysis (CCA) for macroprudential analysis. Uses option theory to construct risk adjusted balance sheets for sovereign, financial and corporate sectors. Allows for development of measures of macrofinancial risk and sectoral inter-linkages. Berg uses Sweden as a case study. Looks at financial and sovereign sectors, and risk transfer and feedback between the two (since financial sector is a contingent liability of the sovereign, thanks to bank guarantee programmes, whereas the banking sector is often exposed to sovereign credit risk through holdings of sovereign debt). Uses Consistent Information Density Optimizing (CIDMO) to measure spillover risk and contingent systemic risk for Swedish banks.


Crisis-Related Policies and Sovereign Balance Sheet Risks

IMF (2009), “Crisis-Related Measures in the Financial System and Sovereign Balance Sheet Risks“.

Policy paper from the IMF. Considers interventions by the authorities in response to the global financial crisis in terms of risks to the sovereign balance sheet, which it defines as the consolidated balance sheet of the budgetary central government, the central bank, other government agencies, plus state enterprises. Recent interventions haven’t had a large impact on deficits, but have nevertheless had a large impact on the size and risk exposure of sovereign balance sheets. Consequently, policy makers face a particular set challenges with respect to managing off-balance sheet contingent risks arising from bank guarantees, developing appropriate frameworks for asset-liability management, establishing strategies for unwinding support, and coordinating the unwinding of programmes internationally where necessary.

The paper briefly summarises government interventions and considers the implications for sovereign balance sheets; a framework for asset liability management is developed and particular issues involving the management of government and central bank balance sheets are discussed; finally, issues surrounding the unwinding of crisis related programmes are explored.

“Is the US sub-prime financial crisis so different?”

Reinhart & Rogoff (2008), “Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison“. AER.

Empirical paper that seeks to put the financial crisis in some kind of international historical context. The authors construct a dataset of post-war “rich country” bank-centred crises for the purposes of comparison with the current crisis, consisting of Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992), plus 13 other episodes of lesser severity. From there, they examine asset prices, real economic growth, and public debt. They find that the US exhibits striking similarities to the archetypal case with respect to house and real equity prices–if anything, it is even worse than the baseline average from the “big five” listed crises. The US current account deficit exceeds the typical deficit by some margin. At the time the paper was written, the shock to US real GDP, however, was not as severe as the “big five” average; neither was the growth of its public debt.

“Getting up to Speed on the Financial Crisis”

Gorton & Metrick (2012), “Getting up to Speed on the Financial Crisis: A One‐Weekend‐Reader’s Guide“. JEL.

Literature review focusing on empirical work that examines the recent financial crisis and surrounding issues. The authors survey 16 papers, which, read together, provide an answer to the question: what happened?

The papers suggested cover: the timeline of the crisis; historical background; crisis build-up; the panics; policy responses; and real effects of the crisis. Of particular interest is the development of the shadow banking sector, which was the key “vulnerability” that was impacted by problems in the quantitatively small US subprime mortgage market, and the development of what could be described as “classic” financial crisis dynamics (e.g., housing bubble, explosion of credit, (shadow) bank runs, etc).


Economics student writes blog about sovereign balance sheets and the global financial crisis.

My intent is for this blog to summarise papers in this vein, but it is possible that I will add some original content as well. I will focus on literature relating to the effect of policy responses to the crisis on government and central bank balance sheets, but also plan to look at empirical literature describing the crisis and events leading up to it, and institutional detail of money markets and government and central bank operating procedures.


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