Fourth generation financial crisis model: İmplementation to the 1975–2011 United States Economy

The past two centuries have seen two major upsurges in capital movements across the globe. The first experience started in the 1860s and continued until World War I, at which time the conduct of economic activities almost fell apart. The collapse of the Bretton Woods system in 1973 triggered the second significant surge, with a major setback during the 1980s Latin American debt crisis. The 1990s witnessed the Mexican, south east Asian, Russian, and Brazilian crises. In an attempt to explain the mechanisms behind the crises that the world economies experienced throughout the last two decades of the 20th century, a series of crisis models have been developed. Krugman, who laid the theoretical foundations of fourth generation financial crisis model, argued that a model with a generally accepted price in the financial sector and the net worth of individuals and private sector would explain financial crises in general as well as currency crises. Theoretical framework of this thesis was established on the behavioral macro equations with certain assumptions. Formation of a financial crisis in the short and long run has been shown by graphs on the output and exchange rate plane as well as matematically by taking derivatives of the equations. In order to gauge the validity of the theoretical approach adopted in this thesis in explaining a real financial crisis, the US economy was scrutinized with data for 1975–2011 period. The results of the logit methodology strongly supported the theoretical model of the thesis. While increasing levels of net worth (wealth) of private agents relative to GDP shield them against a financial crisis under vulnerable and speculative financial market conditions, providing them with cheap and easy credit much more than their real economic capacity to repay will ultimately be invitation for a possible crisis. Keywords: International Capital Movements, Liberalization of Capital Markets, Mundell–Fleming Model, Currency Crises, Financial Crises, Logit Analysis