Shocks, Vulnerability and Therapy

Abstract

Abstract: The global financial crisis of 2008 has left lasting effects on the structure of financial markets, international capital flows, and the cost of capital for developing countries. This paper explains how the crisis originated, and the underlying factors that turned a relatively small collapse in the US subprime mortgage market into a global crisis. It then explores similarities and differences between the current crisis and past experiences. That comparison highlights the main determinants and transmission mechanisms involved, which can help design a better response to the current situation on the one hand, and to prevent future crises or minimize their impact on the other. Finally, the paper discusses structural policies that make countries more resilient to external shocks and also reduce the incidence of home‐grown crises.