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unhedged short-term debt exposures made East Asian markets vulnerable to sudden capital outflows and heightened the magnitude of the subsequent crisis. Moreover, financial integration limited the flexibility of the macroeconomic policy response because of the concern that interest rate reductions would exacerbate capital flight. In the aftermath of the Asian financial crisis and the Great Recession, the highly volatile, short-term, speculative nature of international capital movements has led many emerging market governments to reconsider the benefits of full liberalisation of capital flows (Calvo and Mendoza, 2000). Recently, the IMF has also argued that certain restrictions on cross-border capital flows may be desirable and included such restrictions in some of its recent programmes (for example, in Iceland).
    Financial liberalisation refers to the opening of a country’s financial system to banking institutions (and other financial institutions) from abroad. Research conducted before the crisis suggested that it provided one mechanism for the spread of a crisis from one country to others; as we have noted, the Great Recession reinforced these findings. One policy response is to question the single market principle, under which a bank that is regulated by one jurisdiction is allowed to operate freely in other jurisdictions. There is now a growing consensus that countries have to regulate all financial institutions operating within their jurisdiction (regardless of ownership) and that they should be organised as subsidiaries (not branches), to ensure that there is adequate capital within the country (United Nations, 2010).
    Extensive work on crises and their propagation can be used to understand the history of financial crises, to draw inferences about the origins and spread of the recent financial crisis, and to devise policy frameworks to reduce the occurrence and magnitude of future crises. We have identified a number of mechanisms leading to crises and their contagion. Most of the plausible mechanisms require us to go beyond the standard macroeconomic frameworks based on rational agents with rational expectations operating in well-functioning financial markets. What is needed now is a comprehensive model that integrates various crisis transmission channels and provides a coherent set of policy recommendations both to reduce the magnitude and frequency of shocks, to stem contagion and to respond to the crises that nonetheless occur.
    Endnotes
    1 The authors thank Charles Larkin, Brian Lucey and Constantin Gurdgiev for their helpful suggestions.
    2 As we note below, this was a mistake, which is not uncommon in the presence of supervisory failures.
    3 There were major institutional flaws in the design of NAMA which undermined its ability to fulfil its mission. These are not the subject of this paper.
    4 We say typically because there are exceptions: in the Great Recession, though precipitated by the US banking crisis, the US appeared to be a safe haven, and its exchange rate appreciated. The subsequent low interest rates and depressed wages helped (at least temporarily) to buoy stock market prices, even though economic activity languished.
    5 That this is not so in general—that markets with even large numbers of well-informed participants may look markedly different from those in which all are well informed—is one of the central messages of Salop and Stiglitz (1976). Grossman and Stiglitz (1980) showed that uninformed market participants could extract some, but not all, of the information from the prices generated by informed traders.
    6 The essential insight was that with an overvalued exchange rate the country would generate a trade deficit, which foreign exchange reserves could only finance for a limited amount of time. Of course, if markets anticipated this, with rational expectations, the crisis would occur well before foreign exchange reserves were finally exhausted.
    7 There is some evidence that normal