The Intangible Drivers of Financial Crises. Part 1

Abstract

This article examines the role of intangible factors (negative expectations, lack of confidence, and uncertainty shocks) in the development of financial crises. These factors can trigger conventional crisis mechanisms (such as the formation of credit booms), intervene when fundamentals are weak, or act autonomously (e.g., in the case of a bank run). The first part of this paper presents a brief review of the literature along two dimensions: the development of second-generation models of currency crises, and an analysis of the impact of intangible factors, informed by new ways of measuring them. In particular, the study finds that uncertainty about economic conditions and policies has a significant negative impact on output (mainly by reducing investment activity) but also significantly weakens the effect of fiscal and monetary stimulus measures. In the next part, we discuss alternative approaches to assessing economic agents’ confidence in their governments and central banks, the different types of uncertainty, and the development of such parameters in Russia.