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Liquidity and Contagion: The Crisis of 1763

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Author Info

  • Isabel Schnabel

    (Max Planck Institute for Research on Collective Goods, Bonn,)

  • Hyun Song Shin

    (London School of Economics,)

Abstract

The financial crisis that swept across northern Europe in 1763 bears a strong resemblance to more recent episodes of financial distress. The combination of the specific contractual arrange-ments at the time, interlocking credit relationships, and the high leverage of market participants triggered distress sales of assets, leading to a severe liquidity crisis. Hence, the crisis is an early instance of contagion on the asset side of the balance sheet. We highlight the salient features of the 1763 crisis and propose a stylized model of the events. While the financial institutions have changed fundamentally in the intervening 200 or so years, the underlying problems appear to be universal. (JEL: 6621, E44, N23) Copyright (c) 2004 by the European Economic Association.

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Bibliographic Info

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 2 (2004)
Issue (Month): 6 (December)
Pages: 929-968

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Handle: RePEc:tpr:jeurec:v:2:y:2004:i:6:p:929-968

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