Three Branches of Theories of Financial Crises
In this paper, we review three branches of theoretical literature on financial crises. The first one deals with banking crises originating from coordination failures among bank creditors. The second one deals with frictions in credit and interbank markets due to problems of moral hazard and adverse selection. The third one deals with currency crises. We discuss the evolutions of these branches of the literature and how they have been integrated recently to explain the turmoil in the world economy around the East Asian Crises and in the last few years. We discuss the relation of the models to the empirical evidence and their ability to guide policies to avoid or mitigate future crises.
Previously circulate as "Review of Theories of Financial Crises". The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Itay Goldstein & Assaf Goldstein, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends® in Finance, vol 10(2), pages 113-180.