Monday, December 21, 2009

Take-Home Final Exam Question

Suppose you have these finding from Reinhart and Rogoff (AER: 2009) showing that a banking crisis on average causes:

a. Unemployment to rise for 4.8 years, with an increase in the unemployment rate of about 7 percentage point.
b. Real GDP to decline for 1.9 years, with a decline in real GDP of about 9.3 percent.
c. Cumulative public debt to rise 186.3 percent in the three years following the crisis.

Questions:

a. What is the probability (P) you are willing to assign that not bailing-out Bank Century will not lead to a banking crisis?
b. Multiply P with either a, b, or, c finding above-mentioned. Do you still let Bank Century collapse? Of course you can put the cost of moral-hazard into your equation.

Instruction:

Submit your answer to those Indonesian lawmakers in that special committee before they get confused.

2 comments:

  1. Life as we know it, on the one hand... moral hazard, on the other.

    Those who worry about moral hazard now -- where were they 20, 30, 40 years ago? Why didn't they step forward then, when there were still options?

    ReplyDelete
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