Definitional problems

Recently, due to the fear of large-scale insolvencies in the international banking sector, considerable attention has been given to financial crises as causes of economic fluctuations, and a respectable volume of literature reflects this renewed interest.

Although their common themes are financial crises, it soon became obvious that this term is used to characterize very diverse facts, and the reader cannot help becoming somewhat confused about the question of what really constitutes a financial crisis. How widespread this confusion is, even within the economic profession itself, is reflected in Schwartz's (1986) study entitled “Real and Pseudo-Financial Crises,” where she restates and extends Goldsmith's (1982, 42) view that many of the crises identified in the literature, by Minsky (1982), Kindleberger (1978), and others, were only “at most potential or near crises.” The proposition that a financial crisis is like a pretty girl – difficult to define but recognizable when seen (Kindleberger and Laffargue, 1982, 2) – seems to lead to ambiguous results, as some economists see “pretty girls” where others only recognize “pseudo-pretty girls.”

The underlying problem is the fact that no clear definition of a financial crisis exists – that is, there is no objective and accepted yardstick by which an economic event can be measured for its qualifications as a financial crisis.