A General Model for Financial Crises: An Application to Eurozone Crisis

Abstract

Abstract We provide a mathematical framework to spot the non-resilient periods of an economy and understand the reason why an economy becomes non-resilient. Our non-resilience indicator spots the distressful periods of sixteen European economies successfully over the course of almost thirty years. To understand why these economies became non-resilient, we solve a problem related to survival analysis and establish an analytic relationship between the leverage level of an economy and its macro fundamentals. We apply our approach to the same group of countries and show with a vector autoregressive model why certain indebted European economies still struggle years after the crisis.