The instability of international financial markets, as exhibited by persistent periodic crises, is an important issue for all market participants. This paper presents an alternative agent-based network theory of financial crises derived from recent developments in complexity science, and applies it to short-term currency crises. The theory, despite being parsimonious, is capable of generating c...

Using historical data on post-war financial crises around the world, we show that combination of rapid credit and asset price growth over prior three years, whether in nonfinancial business or household sector, is associated with a 40% probability entering crisis within next years. This compares roughly 7% normal times, when neither nor elevated. Our evidence challenges view are unpredictable “...

This paper proposes a macroeconomic model with financial intermediaries (banks), in which banks face occasionally binding leverage constraints and may endogenously affect the strength of their balance sheets by issuing new equity. The model can account for occasional financial crises as a result of the nonlinearity induced by the constraint. Banks’ precautionary equity issuance makes financial ...

We study the behavior of credit spreads and their link to economic growth during financial crises. Our main finding is that the recessions that surround financial crises are longer and deeper than the recessions surrounding non-financial crises. The slow recovery from the 2008 crisis is in keeping with historical experience of recoveries from financial crises. We reach this conclusion by examin...

The magnitude and frequency of recent financial crises underscore the importance of understanding financial instability for the purpose of crisis prevention and crisis management. This paper brings together and adds structure to the theoretical literature on financial instability and the implications they carry for policy-makers. In addition to clarifying the theoretical underpinnings for study...

The financial system plays a crucial role in economic development. Financial crises are recurrent phenomena in modern financial systems. The literature offers several definitions of financial instability, but it is well known that a financial crisis with a banking crisis is the most common example of financial instability. In this paper we introduce a novel model for detection and prediction of...

The coincidence of banking and currency crises associated with the Asian financial crisis has drawn renewed attention to causal and common factors linking the two phenomena. In this paper, we analyze the incidence and underlying causes of banking and currency crises in 90 industrial and developed countries over the 1975-97 period. We measure the individual and joint (“twin”) occurrence of bank ...

Sustainability for a society means long-term viability, but also the ability to cope with economic crises and disasters. Just as with natural disasters, we can minimize the chance of them occurring and set in place policies to protect the world’s citizens against their consequences. This paper is concerned with the impact of economic crises on the inequality of resources and with the impact of ...