Friday, June 22, 2007

Predicting Financial Crises....

Financial crises are rare events that seem to creep up on us, and then unleash a torrent of turmoil, laying financial waste to the macroeconomic environment. They seem unpredictable - in part because the final trigger of a crash may be something seemingly minor, and of little real financial consequence it its own right. Yet our inability to predict them doesn't stop analysts from trying. At any given point in history, there are sure to be some predicting a crisis just around the corner!

Sometimes it's a useful thought experiment to consider the state of the macroeconomy and try to figure out risks to its continued growth, and growing imbalances that might lead to future crises. It forces us to spell out our underlying model of the macroeconomy, and the implicit assumptions we make about financial markets.

For your bedtime reading, Mark Gilbert outlines one such thought experiment in the context of a story on Bloomberg here.

Related Reading: "Why Stock Markets Crash."

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