Working Paper: NBER ID: w2126
Authors: Barry Eichengreen; Richard Portes
Abstract: A financial crisis is a disturbance to financial markets. associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market’s capacity to allocate capital. In this paper we analyze the generation and propagation of financial crises in an international setting. We provide a perspective on the danger of a serious disruption to the global financial system by comparing the last full-fledged financial crisis - that of the 1930s - with conditions prevailing today. Our definition of a financial crisis implies a distinction between generalized financial crises on the one hand and isolated bank failures, debt defaults and foreign-exchange market disturbances on the other. We represent this distinction in three sets of linkages: between debt defaults; and between exchange-market disturbances and bank failures. In both the 1930s and 1980s, the institutional environment was drastically altered by rapid change in foreign exchange markets, in international capital markets, and in the structure of domestic banking systems. Our comparative analysis underscores the critical role played by institutional arrangements in financial markets as a determinant of the system's vulnerability to destabilizing shocks.
Keywords: financial crises; international finance; banking systems
JEL Codes: E44; G01; F30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial crises (G01) | falling asset prices (G19) |
| falling asset prices (G19) | generalized financial crisis (F65) |
| debt defaults (G33) | bank failures (G21) |
| debt defaults (G33) | generalized crisis (H12) |
| bank failures (G21) | generalized crisis (H12) |
| exchange market disturbances (F31) | bank runs (E44) |
| anticipated devaluations (F31) | bank runs (E44) |
| institutional arrangements (D02) | speed and extent of linkages (F12) |
| institutional arrangements (D02) | system's vulnerability to shocks (P34) |