The cliometric study of financial panics and crashes

Abstract

Financial crises present an identification challenge. On one hand, declines in economic activity often lead to bank failures, while on the other, bank failures often lead to declines in economic activity. To understand the causes of crises and determine their influence subsequent growth, it is vital to untangle these various factors. Approaches require well-constructed empirical models as well as knowledge of existing data and institutions. Each section of this chapter highlights empirical approaches that have been successfully used to study specific aspects of financial crises. Starting with survival and hazard functions, the chapter goes on to cover data envelopment analysis, vector autoregressions, instrumental variables, and difference-in-difference models.