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Why Are There Financial Crises? Recent Developments in Theory

Author

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  • Péter Kondor

    (Department of Finance, London School of Economics and Political Science, London, United Kingdom
    Centre for Economic Policy Research, London, United Kingdom)

Abstract

In financial crises, a period of overheated credit markets turns into a credit crunch accompanied by a systemic breakdown in the financial intermediary sector. Without a deep understanding of their roots, designing policies to decrease the probability of suffering from them or to avoid the worst consequences is like flying blind. In this review, I survey the recent development of the theory of financial crises. I focus on the answers these theories provide to four fundamental questions. What makes the booming phase fragile, and what are the incentives and frictions leading to that fragility? What triggers the crisis? Why is the downturn persistent? Should policy intervene, and if so, how?

Suggested Citation

  • Péter Kondor, 2025. "Why Are There Financial Crises? Recent Developments in Theory," Annual Review of Financial Economics, Annual Reviews, vol. 17(1), pages 77-92, November.
    • Handle: RePEc:anr:refeco:v:17:y:2025:p:77-92
    DOI: 10.1146/annurev-financial-112923-115616
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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