Literature Review: Causes Of The Financial Crisis

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LITERATURE REVIEW A number of causes have been represented in various literatures for financial crisis. A seminal paper by Krugman (1979) proposes that crisis occur when a country having fixed exchange rate tries to oppose fiscal imbalances by deficit financing. It leads to imbalance on foreign currency market and exhaustion of foreign reserves and hence led to collapse of the economic system. The view of long term fiscal imbalances being serious of development of financial crisis came to be known as a first generation view. There’s also a second generation view that became the principal focus of crisis occur. It suggests that self-fulfilling expectations and grouping behavior in capital markets. As Calvo (1995, p. 1) phrases it: If investors…show more content…
Schmidt Hebbel and Serven and Solimano (1996) tried to explain the relation. We know that income is important for savings and risk and profits for investment. So we can say that savings are related to growth. Not only has this but inflation influenced growth. Before 1970, it was believed that inflation had no effect on GDP growth. However Tobin (1965) used Solow model to suggest that opportunity cost of holding money is preferred to accumulate capital hence inflation has a positive impact on growth. A1-Marhubi, 1998, showed negative relation between inflation and economic growth. (ix) Later it was observed that countries with high inflation had poor economic performances. Paul and Kearney and Chowdhury (1997) through their research showed the causality between real growth of GDP and inflation in long run. The main conclusion derived was that we can’t use a single pattern to all countries for inflation and growth. According to them, there are many countries that don’t establish relation between inflation and growth. Also there has been ongoing debate European membership is beneficial for countries to be a part of EU or not. According to neoclassical theory, EU will have temporary effect on growth in its member countries before reaching steady level. Findings suggest that EU membership has positive effect on economic growth and it increases with time. Badinger (2008) showed that economic integration influences…show more content…
This paper represents various macroeconomic indicators for Greece. The study begins with chapter 2 discusses the theoretical relationship between public, private and foreign deficits & also relates how Greek debt evolved with other indicators. The sample period for study is 1986- 2010 and the data is based on time series analysis. Chapter 3 deals with the data and methodology of the research. To analyze the data I have done hypothesis testing using the dependent and independent variables. In chapter 4 we aim to put in forward a better EU system of economic and financial governance to maintain the EU's financial stability and resolve tensions in sovereign debt markets .Chapter 5 concludes the data. Chapter 6 let us know that we need ability to avoid a possible deterioration in public finances and reform fatigue. The purpose of this paper is to examine the performance of the Greek economy over the period 1986-2010 and to gain a better understanding of the challenges and main options facing Greece after its accession to the euro

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