Reflections on the Evolution of Financial Crises: Theory, History and Empirics

Abstract

The world has seen five global financial crises since 1880. They usually involved shocks transmitted from the core countries to the periphery but sometimes the reverse happened, the shocks were transferred from the periphery to the core countries. Theories of financial crises as well as empirical evidence has evolved greatly in the past century. Here I survey the history, theory and empirical evidence on financial crises. A key development in recent years has been the growing connection between financial crises and fiscal crises. This reflects the increasing importance of government guarantees of the banking system and other parts of the financial sector. I focus on this connection and provide evidence on crisis incidence, the costs of financial crises, the determinants of crisis and the feedback loops between fiscal and financial crises.