Global Financial Crisis And Its Effects On The Global Economy

1900 Words8 Pages
Introduction The global financial crisis had a profound on the financial markets leading to recession in a majority of advanced economies and massive growth declines emerging and developing economies. A financial crisis occurs when disruption increases asymmetric information in the financial system affecting efficient channeling of funds (Mishkin & Eakins, 2012). The information asymmetry disrupts the transmission of funds from savers to productive investments and households. The profound nature of the disruption in 2008/09 has adverse effects on the global economy. As a consequence, there was a massive credit squeeze on the general productive investments especially in the largest economies. Possible Causes Agency theory which asserts that “asymmetric information can generate an adverse selection and moral hazard problems” (Mishkin & Eakins, 2012, p.164) forms the basis for the definition of a financial crisis. Disruption in channeling of the funding to productive economic sectors leads to inefficiencies that consequently result in economic downturns. Financial crisis is initiated in a number of ways which include “mismanagement of financial liberalization or innovation, asset price booms and busts, or a general increase in uncertainty caused by failures of major financial institutions” (Mishkin & Eakins, 2012, p.164). There are structural underpinnings to several financial crises including the one in 2008/09. The collapse of financial markets in 1929 that led to the Great
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