Banking and Currency Crisis and Systemic Risk: A Taxonomy and Review

Many countries have experienced ,banking ,and currency crises in recent ,years. Although these crises appear to share many common causes and consequences, they have generally been analysed by different sets of economists. This paper develops a common framework, applies this framework to analysing recent crises, evaluates the historical evidence, and suggests potential solutions. Governments are identified as one of the major causes of the,crises through first providing poorly structured financial guarantees that both increase fragility and misallocate resources, then pursuing unstable macroeconomic policies that produce losses, and finally attempting to conceal the problems as long as possible before being forced to take corrective actions that, at least in the short run, often exacerbate the costs before restoring equilibrium.