Working Paper: NBER ID: w3400
Authors: Frederic S. Mishkin
Abstract: This paper examines the nature of financial crises from a historical perspective using the new and burgeoning literature on asymmetric information and financial structure. After describing how this literature helps to understand the nature of financial crises, the paper focuses on a historical examination of a series of financial crises in the United States, beginning with the panic of 1857 and ending with the stock market crash of October 19,1987. The asymmetric information approach explains the patterns in the data and many features of these crises which are otherwise hard to explain. It also suggests why financial crises have had such important consequences for the aggregate economy over the past one hundred and fifty years.
Keywords: asymmetric information; financial crises; historical perspective
JEL Codes: E44; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asymmetric information (D82) | adverse selection (D82) |
| adverse selection (D82) | higher interest rates for all borrowers (E43) |
| higher interest rates for all borrowers (E43) | decline in lending (G21) |
| decline in lending (G21) | reduction in investment (G31) |
| reduction in investment (G31) | decline in economic activity (F44) |
| increased uncertainty in financial markets (G19) | exacerbation of adverse selection problem (D82) |
| exacerbation of adverse selection problem (D82) | further contraction in lending and investment (G21) |
| asymmetric information (D82) | moral hazard (G52) |
| moral hazard (G52) | risky behavior by borrowers (G21) |
| risky behavior by borrowers (G21) | decrease in efficiency of financial markets (G14) |
| decrease in efficiency of financial markets (G14) | decline in aggregate economic activity (F44) |
| asymmetric information (D82) | bank panics (F65) |
| bank panics (F65) | contraction of loans and deposits (G21) |
| contraction of loans and deposits (G21) | economic downturns (F44) |