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Anatomy of a Financial Crisis

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Author Info
Frederic S. Mishkin

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Abstract

This paper provides an asymmetric information framework for understanding the nature of financial crises. It provides the following precise definition of a financial crisis: A financial crisis is a disruption to financial markets in which adverse selection and moral hazard problems become much worse, so that financial markets are unable to efficiently channel funds to those who have the most productive investment opportunities. As a result, a financial crisis can drive the economy away from an equilibrium with high output in which financial markets perform well to one in which output declines sharply. The asymmetric information framework explains the patterns in the data and many features of these crises which are otherwise hard to explain. It indicates that financial crises have effects over and above those resulting from bank panics and therefore provides a rationale for an expanded lender-of-last resort role for the central bank in which the central bank uses the discount window to provide liquidity to sectors outside of the banking system.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3934.

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Date of creation: Oct 1992
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Handle: RePEc:nbr:nberwo:3934

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References listed on IDEAS
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  1. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August. [Downloadable!] (restricted)
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  2. Mccallum, Bennet T., 1988. "Robustness properties of a rule for monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 173-203, January. [Downloadable!] (restricted)
  3. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Steven Ongena, 1999. "Lending Relationships, Bank Default and Economic Activity," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 6(2), pages 257-280, July. [Downloadable!] (restricted)
  2. Martti Vihanto, 2007. "Endogenous preferences, emotions, and the breaking of social capital into economics," Discussion Papers 18, Aboa Centre for Economics. [Downloadable!]
  3. Glenn Hoggarth & Ricardo Reis & Victoria Saporta, . "Costs of banking system instability: some empirical evidence," Bank of England working papers 144, Bank of England. [Downloadable!]
    Other versions:
  4. John S. Jordan & Joe Peek & Eric S. Rosengren, 1999. "Impact of greater bank disclosure amidst a banking crisis," Working Papers 99-1, Federal Reserve Bank of Boston. [Downloadable!]
  5. Jorge A. Chan-Lau & Zhaohui Chen, 1998. "Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation—with Reference to the Asian Financial Crisis," International Finance 9804001, EconWPA, revised 24 Apr 1998. [Downloadable!]
  6. Omar F. Saqib, 2002. "Interpreting Currency Crises: A Review of Theory, Evidence, and Issues," Discussion Papers of DIW Berlin 303, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  7. Tassos G. Anastasatos & Ian R. Davidson, 2006. "How Homogenous are Currency Crises? A Panel Study Using Multiple-Response Models," Working Papers 52, Bank of Greece. [Downloadable!]
  8. R.T.A. de Haas, 2001. "Financial development and economic growth in transition economies A survey of the theoretical and empirical literature," Research Series Supervision (discontinued) 35, Netherlands Central Bank, Directorate Supervision. [Downloadable!]
  9. Wyplosz, Charles, 1999. "Financial Restraints and Liberalization in Postwar Europe," CEPR Discussion Papers 2253, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  10. Costa i Font, Joan & Pigem Vigo, Mònica, 1999. "Financial Crises and Transmission Mechanisms," ERSA conference papers ersa99pa054, European Regional Science Association. [Downloadable!]
  11. Tassos Anastasatos & Ian R. Davidson, 2004. "How Homogenous are Currency Crises? A Panel Study using Multiple-Response Models," Discussion Paper Series 2004_23, Department of Economics, Loughborough University, revised Dec 2004. [Downloadable!]
  12. David S. Bieri, 2004. "The Basel Process and Financial Stability," Macroeconomics 0412001, EconWPA. [Downloadable!]
  13. Barry Eichengreen & Andrew K. Rose, 1998. "Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises," NBER Working Papers 6370, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Livio Stracca, 2005. "Liquidity and real equilibrium interest rates - a framework of analysis," Working Paper Series 542, European Central Bank. [Downloadable!]
  15. Joseph Mason, 2001. "Do Lender of Last Resort Policies Matter? The Effects of Reconstruction Finance Corporation Assistance to Banks During the Great Depression," Journal of Financial Services Research, Springer, vol. 20(1), pages 77-95, September. [Downloadable!] (restricted)
  16. Jian Tong & Chenggang Xu, 2004. "Financial Sector Returns and Creditor Moral Hazard: Evidence from Indonesia, Korea, and Thailand," William Davidson Institute Working Papers Series 2004-687, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  17. Hernando Vargas Herrera & Dpto de Estabilidad Financiera, . "El Riesgo de Mercado de la Deuda Pública: ¿Una Restricción a la Política Monetaria? El Caso Colombiano," Borradores de Economia 382, Banco de la Republica de Colombia. [Downloadable!]
  18. Tassos Anastasatos & Ian R. Davidson, 2004. "An Empirical Characterisation of Speculative Pressure: A Comprehensive Panel Study Using LDV Models in High Frequency," Discussion Paper Series 2004_8, Department of Economics, Loughborough University, revised Aug 2004. [Downloadable!]
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