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Financial Crises: Taking Stock

Those who cannot remember the past are condemned to repeat it.

The world has been littered with many financial crises over the centuries, yet many a time these lessons are ignored, and crises recur.  Indeed, there are many clear lessons on the causes of past crises, the severity of their consequences, and how future crises can be prevented or better managed when they occur.

This applies to the 2007-09 global financial crisis that brought colossal disruptions in asset and credit markets, massive erosions of wealth, and unprecedented numbers of bankruptcies.  Six years after the crisis began, its lingering effects are still visible in advanced and emerging markets alike. It is, therefore, a good time to take stock.

A new book, “Financial Crises: Causes, Consequences, and Policy Responses (which I co-edited with M. Ayhan Kose, Luc Laeven, and Fabian Valencia), does exactly that: it provides a comprehensive overview of research on financial crises and surveys policy lessons in the context of a wide range of crises, including banking, balance of payments, and sovereign debt crises. We present four key insights.

Prevention is better than a cure

The book presents a wealth of valuable lessons on how to better monitor and reform economies and financial systems to avoid crises and provides an overview of critical policy areas. But it covers more than these insights – it also introduces a comprehensive database covering various types of crises and has lessons from sovereign debt restructuring episodes. And, given that much remains to be explored, the book also provides a guide for future research.