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

by vimothy

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.