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Financial Crises: Theory and Evidence

  • 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)

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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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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  1. Reinhart, Carmen M. & Rogoff, Kenneth, 2009. "The Aftermath of Financial Crises," CEPR Discussion Papers 7209, C.E.P.R. Discussion Papers.
  2. Carlsson, H. & Van Damme, E., 1990. "Global Games And Equilibrium Selection," Papers 9052, Tilburg - Center for Economic Research.
  3. 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.
  4. 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.
  5. Castiglionesi, F. & Navarro, N., 2007. "Optimal Fragile Financial Networks," Discussion Paper 2007-100, Tilburg University, Center for Economic Research.
  6. Morrison, Alan & White, Lucy, 2004. "Crises and Capital Requirements in Banking," CEPR Discussion Papers 4364, C.E.P.R. Discussion Papers.
  7. Marie Hoerova & Cornelia Holthausen & Florian Heider, 2009. "Liquidity hoarding and interbank market spreads: the role of counterparty risk," 2009 Meeting Papers 929, Society for Economic Dynamics.
  8. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
  9. Guillaume Plantin & Igor Makarov, 2009. "Equilibrium Subprime Lending," 2009 Meeting Papers 456, Society for Economic Dynamics.
  10. 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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