Financial Crises: History, Theory and New Insights

This review essay discusses the history, causes and consequences of financial crises. In recent years scholars have assembled new sources of data and utilized new empirical designs to analyze crises, shedding light on old questions and producing new insights. This essay highlights those new insights, and uses the historical record of crises in the United States to put those insights into perspective. I begin with a discussion of the defining characteristics of financial crises and their evolution, both in the U.S. and in the rest of the world. I then revisit the chronology of crises in the U.S. since 1870. Data on bank failure rates and large-bank equity losses suggest that some panics were not full-blown financial crises, and also identify episodes when no panic occurred that could potentially be considered crises. I then turn to two categories of theoretical models developed to analyze the mechanisms responsible for crises. The first focuses on asset price bubbles, which have been associated with many crises. The second is focused on the dynamics of bank runs and panics, which have been especially common in the United States. Finally, I present an overview of the effects of crises and the mechanisms transmitting financial distress in the banking system into the rest of the economy. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.