ABSTRACT
This chapter explains the main theories of financial crises and the important differences among the various writers. The Business-Cycle perspective and Credit-Market Perspective consists of two major points. First, financial crises are the result of the normal functioning of the economic and financial systems over the course of the business cycle. Second, the crisis is brought about because of developments in the demand and supply of credit. The differences among the various theorists have to do with their specific interpretations within this overall framework. These differences concern the reasons for the development of financial difficulties in the business sector, the factors influencing the demand and supply of credit, and the defining patterns of a financial crisis. According to Hyman P. Minsky, three developments that typically occur towards the end of the expansion are correlated with financial fragility: an increase in the use of short-term debt, a decline in liquidity, and an increase in interest rates, especially short-term rates.
