In this chapter, we test the theories of financial instability outlined in Ch. 5 against evidence from six periods of financial instability since 1973, namely the UK secondary banking crisis of December 1973, the Herstatt crisis of June 1974, the advent of the LDC Debt Crisis in August 1982, the crisis in the FRN market of December 1986, the equity market crash of October 1987, and the US thrifts crises of the 1980s. Background on wholesale financial markets—in which most of the crises occurred—is provided in Sect. 1. In Sect. 2, the events of the periods of financial disorder are outlined. Three crises took place largely in international capital markets; one linked international and domestic and the other two were purely in domestic financial markets. Virtually all occurred in unregulated or liberalized financial markets. Section 3 sets these crises in the context of the long‐run behaviour of prices and quantities in the financial markets with a graphical illustration of the 1966–90 period. The behaviour of key economic indicators as well as market prices and quantities surrounding these events is examined in more detail in Sect. 4. These sections permit a qualitative evaluation in Sect. 5 of the theories of crisis; the results also cast light on the behaviour of financial markets under stress and give indications of appropriate policy responses.
Keywords: domestic financial markets; economic indicators; equity market crash; financial instability; international capital markets; LDC debt crisis; liberalized financial markets; market prices; US thrifts crisis; wholesale financial markets
Chapter. 22955 words. Illustrated.
Subjects: Financial Markets
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