ABSTRACT
There are many different ways to define a financial crisis. Indeed, the economics and finance literature is filled with terms like panic, financial crisis, runs, systemic crisis, or contagion. There is in fact little agreement on even the rudimentary definitions of a financial crisis, the sequence of events constituting a crisis, or the causes of these events. Macroeconomists typically are concerned with explaining business cycle fluctuations and determining when a recession will degenerate into a depression. One prominent thesis argues that the financial system is inherently unstable and is therefore vulnerable to random shocks. Shocks simultaneously cause market participants to lose confidence in the system and exchange their bank deposits for currency. Others believe that such herd behavior cannot be explained solely by shocks that, like animal spirits, randomly induce depositors to run from bank deposits to currency. In this scenario, credit problems lead to a reduction in bank deposits, contracting the money supply.
