Financial Crises and Recession in the Global Economy, Second Edition

Financial Crises and Recession in the Global Economy, Second Edition

Roy E. Allen

This timely and authoritative book explains the rise and fall of economies in Asia, Central America and Europe since 1980 and discusses these crises in the context of continuing economic globalization. This updated and fully revised edition includes a detailed account of the Mexican crisis of 1994–95, the Japanese crisis which has worsened in the late 1990s and the Asian crisis which emerged in 1997. Professor Allen discusses the impact of new uses and forms of money, and new financial flows such as electronic monies and offshore financial markets.

Chapter 1: The Expansion and Globalization of Financial Markets

Roy E. Allen

Subjects: economics and finance, financial economics and regulation, international economics

Extract

Page 1  1. The Expansion and Globalization of Financial Markets  The rapid expansion and globalization of financial markets shadows most other recent developments in international economics. This chapter documents and defines  financial globalization and discusses what caused it: developments in information­processing technologies; government deregulation; and the more global nature of all  economic activity. International interest rate parities and financial strategy parities are presented as new, dominant, dynamic equilibria in the global economy.  An understanding of these structural changes and new equilibria provides a necessary introduction to subsequent chapters, where it will be argued that the financial  globalization processes have increased the risk of economic crises. In later chapters it will also be argued that financial market globalization has been a driving force  behind the large US trade deficits and other controversial new trade patterns. In addition, the self­adjustment mechanisms within the global economy have been  irreversibly changed by financial globalization.  I. THE RAPID EXPANSION OF INTERNATIONAL FINANCE  Clearly, the last two decades has seen an explosion of international financial activity. The London Eurodollar market, now the major market for the world's largest  financial institutions, was in its infancy several decades ago — turnover in the entire year of 1970 was $59 billion. But by the mid­1980s it was turning over $300 billion  of financial capital on an average working day. This volume was many times the total reserves of the world's central banks and at least 25 times the value of world trade  in merchandise and services. The...

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