, etc. however, shocks to the financial system make the adverse selection and moral hazard problems worse, and then credit tends to dry up, which is termed a “ credit crunch. ” the lack of credit leads individuals and firms to cut their spending, resulting in a contraction of economic activities. four factors exacerbate asymmetric information problems, contributing to financial instability : the deterioration of financial sector balance sheets, rise of interest rates, increases in uncertainty, and the deterioration of non - financial sector balance sheets due to changes in asset prices. this is why the government and the central bank intervene in financial markets promptly during a crisis. the central bank provides liquidity by acting as “ the lender of last resort. ” this helps the payment system work smoothly, and prevents the price of assets from dropping excessively. this, in turn, helps financial firms keep their balance sheets in better shape. the government injects public funds into banks for recapitalization and helps financial firms dispose of their non - performing assets by establishing special agents or bad banks. sometimes, the government and the central bank engage in financial markets directly by taking over banks or buying commercial papers. another important measure is enhancing transparency by disclosing key economic, financial and corporate sector information. all these measures alleviate the asymmetric information problem, helping prevent herd behavior. so far, we talked about the causes and amplification mechanisms of crises. bearing this theoretical understanding in mind, let us move on to the history of economic crises. 3. a short history of financial crises today, i would like to review four major financial crises that have taken place since 1980. these are the latin american debt crisis of the 1980s, the nordic banking crisis of the early 1990s, the asian currency crisis of the late 1990s, and the latest us financial crisis in 2007. i chose them because they are most relevant for understanding the evolution of the global economy, although the choice may be somewhat arbitrary. i leave out the crisis which took place in japan in the early 1990s and the long - term stagnation afterwards not only because i would not presume to venture in an area where your expertise is preeminent, but also it does not have great relevance to today ’ s topic. as we review each crisis, we will find common characteristics as well as its own particular features. 3. 1 latin america ’ s debt crisis of the 1980s let ’ s start by looking at the latin american debt crisis of the 1980s. in the

net domestic assets since the second half of 1998. bringing these aggregates under control conveyed two basic messages : first, that public sector deficits would no longer be monetized with the central bank resources, and second, that henceforward the central bank will increase its turkish lira liabilities only to finance an increase in its net foreign assets. the substantial decreases in “ credit to the treasury ” item and overall net domestic assets, and the large increase in the central bank ’ s net foreign assets, are the result of these policies. here, of course, we should take account of the damage done by the russian crises. the capital outflows connected with these crises caused net foreign assets to decrease, which in turn produced an increase in domestic assets. even so, the source of the latter increase was not the increase in public sector credits but mainly the increase in central bank funding to the banks. another aspect of the central bank ’ s monetary program is related to exchange rate policy. the proposal to conduct exchange rate policy in accordance with the inflation target has important implications for expectations. first of all, it signalled to the market that the central bank endorsed the government ’ s inflation target. since the public can monitor the exchange rates daily, exchange rate policy becomes an important tool for moving the public ’ s inflation expectations towards the government ’ s inflation target. of course the continued success of this policy requires the authorities to set a realistic inflation target, which is to say an inflation target consistent with the public sector ’ s proposed budget balance. besides influencing inflation and inflationary expectations, exchange rate policy directly affects the external sector. a stable real exchange rate policy puts the central bank in a neutral position in this respect. that is, the central bank neither intends to use exchange rates to support exports, nor does it intend to harm turkey ’ s long - term trade competitiveness. the implication of the central bank ’ s stable real exchange rate policy is that the economy ’ s current account balance is determined by real sector developments. here the decline in domestic demand in recent months has made its mark. as imports decreased, the foreign trade balances improved significantly. as a result of this, turkey ended 1998 with a current account surplus of us $ 1, 871 million. in 1999, a small current account deficit is expected, mainly due to an expected rise in domestic demand in the second half of the year. the coordination of fiscal and monetary policies has succeeded in reducing the inflation rate from 91 % in 1997