Modelling Financial Instability: A Survey of the Literature

The magnitude and frequency of recent financial crises underscore the importance of understanding financial instability for the purpose of crisis prevention and crisis management. This paper brings together and adds structure to the theoretical literature on financial instability and the implications they carry for policy-makers. In addition to clarifying the theoretical underpinnings for studying financial crises, it points to several directions for future theoretical research necessary to fill the gaps of our understanding of financial instability.