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Financial Crises: Theory and Evidence

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Author Info

  • Franklin Allen
  • Ana Babus
  • Elena Carletti

    ()
    (Finance Department, The Wharton School, University of Pennsylvania, Philadelphia, Pennyslvania 19104-6367
    Center for Financial Analysis and Policy, Cambridge University, Cambridge CB2 1AG, United Kingdom
    European University Institute, Florence 50133, Italy)

Abstract

Financial crises have occurred for many centuries. They are often preceded by a credit boom and a rise in real estate and other asset prices, as in the current crisis. They are also often associated with severe disruption in the real economy. This paper surveys the theoretical and empirical literature on crises. The first explanation of banking crises is that they are a panic. The second is that they are part of the business cycle. Modeling crises as a global game allows the two to be unified. With all the liquidity problems in interbank markets that have occurred during the current crisis, there is a growing literature on this topic. Perhaps the most serious market failure associated with crises is contagion, and there are many papers on this important topic. The relationship between asset price bubbles, particularly in real estate, and crises is discussed at length.

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File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.financial.050808.114321
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Bibliographic Info

Article provided by Annual Reviews in its journal Annual Review of Financial Economics.

Volume (Year): 1 (2009)
Issue (Month): 1 (November)
Pages: 97-116

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Handle: RePEc:anr:refeco:v:1:y:2009:p:97-116

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Related research

Keywords: bubble; banks; liquidity; contagion;

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References

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers 595, China Economics and Management Academy, Central University of Finance and Economics.
  2. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  3. Morrison, Alan & White, Lucy, 2004. "Crises and Capital Requirements in Banking," CEPR Discussion Papers 4364, C.E.P.R. Discussion Papers.
  4. Reinhart, Carmen & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
  5. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
  6. Castiglionesi, F. & Navarro, N., 2007. "Optimal Fragile Financial Networks," Discussion Paper 2007-100, Tilburg University, Center for Economic Research.
  7. Gara M. Afonso & Hyun Song Shin, 2008. "Systemic risk and liquidity in payment systems," Staff Reports 352, Federal Reserve Bank of New York.
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