Understanding Financial Crises

• Written by two leading academics, Franklin Allen, former President of the American Finance Association, and Douglas Gale
• Provides the reader with an overview of the history of financial crises and the main economic tools needed for decision making in financial crises
• Aids readers' understanding by gradually increasing the level of sophistication used in each model

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.

Readership: Suitable for advanced undergraduates, graduates and academics; Policymakers and government officials; and bankers interested in understanding the latest economic theories on the causes and consequences of financial crises.