What causes a financial crisis? Can financial crises be anticipated or even avoided? What can be done to lessen their impact? Should governments and international institutions intervene? Or should financial crises be left to run their course? In the aftermath of the Asian financial crisis, many blamed international institutions, corruption, governments, and flawed macro and microeconomic policies not only for causing the crisis but also unnecessarily lengthening and deepening it. Based on ten years of research, the authors develop a theoretical approach to analyzing financial crises. Beginning with a review of the history of financial crises and providing readers with the basic economic tools needed to understand the literature, the authors construct a series of increasingly sophisticated models. Throughout, the authors guide the reader through the existing theoretical and empirical literature while also building on their own theoretical approach. The text presents the modern theory of intermediation, introduces asset markets and the causes of asset price volatility, and discusses the interaction of banks and markets. The book also deals with more specialized topics, including optimal financial regulation, bubbles, and financial contagion.
"Allen and Gale have been at the frontier of theoretical thinking about crises for over a decade ... a one-stop-shop for the many important contributions made to the theoretical modelling of financial crises by these two prominent authors"
- Central Banking Vol 18 No 1
"This is, for me, the book's real selling point: it is accessible to a graduate level audience - indeed, would make an excellent lecture series - but at the same time easily contains enough state-of-the-art modelling to be of interest to the academic or policymaker."
- Andrew G. Haldane
1. History and institutions
2. Time, uncertainty and liquidity
3. Intermediation
4. Asset markets
5. Financial fragility
6. Intermediation and markets
7. Optimal regulation
8. Money and the prices
9. Bubbles and crises
10. Contagion
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