Preparing for the Next Financial Crisis

46 Financial cycles and crises

2.3 Crises

Crises (and booms) are the most intense forms of nancial cycles because large

movements in nancial variables are often associated with highly volatile uctu-

ations in economic activity (Terrones etal., 2011). However, there is no unani-

mously accepted denition of nancial crises. They can be considered from two

perspectives, empirical (2.3.1) and theoretical (2.3.2), with the two approaches

informing each other (Gorton, 2012). Since the GFC, recent research has inves-

tigated balance sheet and leverage constraints facing all types of borrowers and

the non- linear character of nancial crises (2.3.3).

2.3.1 Empirical approaches

Economic history reveals eight patterns, identied by the empirical l