Working Paper: NBER ID: w18670
Authors: Itay Goldstein; Assaf Razin
Abstract: In this paper, we review three branches of theoretical literature on financial crises. The first one deals with banking crises originating from coordination failures among bank creditors. The second one deals with frictions in credit and interbank markets due to problems of moral hazard and adverse selection. The third one deals with currency crises. We discuss the evolutions of these branches of the literature and how they have been integrated recently to explain the turmoil in the world economy around the East Asian Crises and in the last few years. We discuss the relation of the models to the empirical evidence and their ability to guide policies to avoid or mitigate future crises.
Keywords: Financial Crises; Banking Crises; Credit Frictions; Currency Crises
JEL Codes: E61; F33; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| withdrawal of funds by one depositor (G21) | bank run (E44) |
| bank run (E44) | bank failure (G28) |
| bank failure (G28) | additional withdrawals (G51) |
| credit frictions (E51) | market freezes (D49) |
| moral hazard and adverse selection (D82) | credit rationing (G21) |
| credit conditions (F34) | economic stability (E63) |
| initial economic shocks (F44) | exacerbation of crises (H12) |
| coordination failures among speculators (D84) | currency devaluation (F31) |