TEL  Vol.4 No.1 , February 2014
Financial Crisis in Retrospect: Bad Luck or Bad Policies?
ABSTRACT

It is generally acknowledged that many recent financial crises, in both emerging and mature markets, are characterized by large scale coordination problems with common origins. Despite minimal consensus on their primary causes, most prominent theories suggest that these financial crises can be classified as either the result of bad policies or bad luck. In this paper, we attempt to outline the sources of coordination failure in financial markets due to the “soft budget constraints” produced by time-inconsistent policies in combination with elastic expectations on the part of financial investors. Thus, in our framework, financial crisis is conceived as the result of both bad policies and bad luck. That is, it results from a mismatch of institutional arrangements to the realities of human behavior.


Cite this paper
G. Dempster and J. Isaacs, "Financial Crisis in Retrospect: Bad Luck or Bad Policies?," Theoretical Economics Letters, Vol. 4 No. 1, 2014, pp. 83-88. doi: 10.4236/tel.2014.41013.
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