NBER WORKING PAPER SERIES
THE ANATOMY OF FINANCIAL CRISES
Working Paper No. 2126
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 January 1987
Paper prepared for the conference on "Risk, International Financial Markets, and Public Policy" organised by the International Center for Monetary and Banking Studies, Geneva, 11-13 September 1986, in collaboration with the Centre for Economic Policy Research. We thank H.M. Stationary Office for permission to cite documents from the Public Record Office, Anita Santorum for research assistance, and Jane Maurice for cheerful secretarial help beyond the call of duty. Anthony Harris, Joan Pearce and our discussants offered very useful comments, as did the seminar group at the Institute for International Economic Studies (Stockholm), where an early version of the work was presented in April 1986. The paper will appear in R. Portes and A. Swoboda, eds., Threats to International Financial Stability, Cambridge University Press, 1987. This paper is part of a research program on Macroeconomic Interactions and Policy Design in an Interdependent World supported by grants from the Ford Foundation (No. 850-1014) and the Alfred P. Sloan Foundation (No. 85-12-13) whose help is gratefully acknowledged. The research reported here is part of the NBER's research program in International Studies. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research.
NBER Working Paper #2126 January 1987
The Anatomy of Financial Crises
A financial crisis is a disturbance to financial markets, associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market's capacity to allocate capital. In this paper we analyze the generation and propagation of financial crises in an international setting. We provide a perspective on the danger of a serious disruption to the global financial system by comparing the last full—fledged financial crisis — that o the 1930s — with conditions prevailing today. Our definition of a financial crisis implies a distinction between generalized financial crises on the one hand and isolated bank failures, debt defaults and foreign—exchange market disturbances on the other. We represent this distinction in three sets of linkages: between debt defaults; and between exchange—market disturbances and bank failures. In both the 1930s and 1980s, the institutional environment was drastically altered by rapid change in foreign exchange markets, in international capital markets, and in the structure of domestic banking systems. Our comparative analysis underscores the critical role played by institutional arrangements in financial markets as a determinant of the system's vulnerability to destabilizing shocks.
Barry Eichengreen Department of Economics Harvard University
Cambridge, MA 02138
Richard Portes Director Centre for Economic Policy Research 6 Duke of York Street
London SW1Y 6LA
The Anatomy of Financial Crises
Barry Eichengreen and Richard Portes
Much as the study of disease is one of the most effective ways to learn about human biology, the study of financial crises
provides one of the most revealing perspectives on the functioning
of monetary economies. Indeed, epidemiological metaphors like fever and contagion feature prominently in the literature on
financial crises. Rinancial crises, like contagious disease, threaten not only the host organism, namely the financial market, but the entire economic environment in which that host resides.
There exists a voluminous historical literature concerned with
episodes labelled financial crises.1 Yet the usefulness of much of this literature is limited by the absence of any definition of the phenomenon under consideration and hence of a minimal structure...
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