Understanding Financial Crises: A Developing Country Perspective

65 Pages Posted: 24 Sep 1996 Last revised: 16 May 2000

See all articles by Frederic S. Mishkin

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: May 1996

Abstract

This paper explains the puzzle of how a developing economy can shift from a path of reasonable growth before a financial crisis, as in Mexico in 1994, to a sharp decline in economic activity after a crisis occurs. It does so by outlining an asymmetric information framework for analyzing banking and finan- cial crises in developing countries. The asymmetric inforamtion framework shows why the banking sector is so important to the economy, and provides a rationale for bank regulation and supervision. This asymmetric information framework is then used to understand why banking and financial crises occur and why they can have such a devastating effect on the economy countries. The paper concludes by discussing policy implications for developing countries. An important theme is that an appropriate institutional structure is critical to preventing banking and financial crises in developing countries and to reducing their undesirable effects if they should occur.

Suggested Citation

Mishkin, Frederic S., Understanding Financial Crises: A Developing Country Perspective (May 1996). NBER Working Paper No. w5600. Available at SSRN: https://ssrn.com/abstract=7756

Frederic S. Mishkin (Contact Author)

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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