Financial Crises - Factors causing financial crises

4 important questions on Financial Crises - Factors causing financial crises

When does financial crisis occur?

When there is a particularly large disruption to information flows in financial markets, with the result that financial frictions increase sharply and financial markets stop functioning.

What is irrational exuberance?

Extreme investor enthusiasm that drives up the prices

What is capital flight?

Countries that convert a portion of their local currency to foreign currency and invest in a safe haven
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What are the factors causing financial crises?

  1. Asset market effects in balance sheets
  2. deterioration in financial institutions' balance sheet
  3. banking crisis
  4. increase in uncertainty
  5. increase in interest rates
  6. government fiscal imbalances

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