Financial Crises: Explanations, Types, and Implications; by Stijn Claessens and M. Ayhan Kose; imf working Paper 13/28; January 1, 2013

VII.   C

ONCLUSIONS

 

A Summary  

 

This paper presents a survey on financial crises to answer three specific questions. First, what 

are the main factors explaining financial crises? Although the literature has clarified some of 

the main factors driving crises, it remains a challenge to definitively identify their causes. 

Many theories have been developed over the years regarding the underlying causes of crises. 

These have recognized the importance of booms in asset and credit markets that turned into 

busts as the main driving forces of most crises episodes. Given their central roles, the paper 

briefly summarizes the theoretical and empirical literature analyzing developments in credit 

and asset markets around financial crises.  

 

Second, what are the major types of crises? While financial crises can take various shapes 

and forms, the literature has focused on four major types of crises: currency crises; sudden 

stop (or capital account or balance of payments) crises; debt crises; and banking crises. It is 

possible to classify crises in other ways, but regardless they can often overlap in types. A 

number of banking crises, for example, are also sudden stop episodes and currency crises. 

The paper examines the literature on the analytical causes and empirical determinants of each 

type of crisis. In addition, it presents a review of studies on various approaches for the 

identification of crises, their frequency over time and across different groups of countries. 

 

Third, what are the real and financial sector implications of crises? Large output losses are 

common to many crises and other macroeconomic variables (consumption, investment and 

                                                 

30

 Shin (2013) compares the predictive power from price-based measures (CDS and other spreads, 

implied volatility, Value-at-Risk, etc.), the gap of credit-to-GDP ratio from a trend, and monetary 

aggregates and other bank liability aggregates, and shows that the last group has the most predictive 

power. 

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 35 

industrial production) typically register significant declines. Financial variables like asset 

prices and credit usually follow qualitatively similar patterns across crises, albeit with 

variations in terms of duration and severity of declines. The paper provides a summary of the 

literature on the macroeconomic and financial implications of crises. 

 

The paper also briefly reviews the literature on the prediction of crises. While there are many 

benefits in knowing whether and if so when a crisis may occur, it has been a challenge to 

predict crises. It is easy to document vulnerabilities, such as increasing asset prices and high 

leverage, but it remains difficult to predict with some accuracy the timing of crises. No single 

set of indicators has proven to predict the various types of crises. The paper reviews how the 

empirical literature on prediction of crises has evolved and analyzes its current state.