Document Type

Article

Publication Date

Fall 2009

Abstract

Since July 2007, the world economy has experienced a severe financial crisis that originated in the U.S. housing market. Subsequently, the crisis has spread to financial sectors in European and Asian economies and led to a severe worldwide recession. The existing literature on financial crises rarely distinguishes between factors that create the original strain on the financial sector and factors that explain why these strains lead to system-wide contagion and a possible credit crunch. Most of the literature on financial crises refers to factors that cause an original disruption in the financial system. We argue that a financial crisis with its contagion within the system is caused by failures of legal, regulatory, and political institutions. One policy implication of our view is that various forms of financial rescue would be reduced in times of crisis if appropriate controls and safeguards were already in place. We draw on experiences from the financial crises in the Nordic countries at the end of the 1980s and the beginning of the 1990s. In particular, the Swedish model for crisis resolution, which has received attention during the current crisis, is discussed to illustrate the problems policymakers face in a financial crisis without appropriate institutions. We discuss European Union approaches to the current crisis before turning to policy implications from an emerging market perspective in the current crisis.

Comments

This article was originally published in Asian Economic Papers, volume 8, issue 3, in 2009. DOI: 10.1162/asep.2009.8.3.178

Peer Reviewed

1

Copyright

MIT Press

 
 

To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.