The economic and human costs of currency and financial crises can be enormous. For several decades most economists and policy officials in the United States and Western Europe considered these as things that happened to emerging market and developing countries. The global financial crisis that started in the United States and the crisis in the euro zone that followed a little later clearly laid bare the false hubris of this view. For many years we have been studying the causes of currency and financial crises such as the Mexican crisis of 1994-95, the Asian crisis of 1997-98, the Russian crisis of 1998, and the crises in Latin America and Turkey a few years later. 

Our studies of the recent crises find that many of the same factors were at work in the crises in the United States and Europe. Careful supervision and risk management is crucial for liberalized financial markets to work well and regulators, the ratings agencies, and the financial markets have frequently failed to give early warnings of the buildup of dangerous disequilibrium in foreign exchange markets, financial institutions, and government fiscal situations. In many cases risk management systems that appeared to be very sophisticated mathematically but were based on fundamental economic errors gave probate markets and public officials alike a false sense of confidence that modern financial engineering had conquered risk, leading to false beliefs that substantial increase in leverage were safe. Many of the new financial instruments and techniques can make valuable contributions to managing risk in normal times but their underlying assumptions generally break down during crises when they matter most. 

In our view one of the major lessons of recent crises is that we need to develop a better understanding of how financial markets and institutions behave. We believe that the standard economic and financial models based on the assumption of rational expectations and efficient financial markets are valuable for explaining economic and financial behavior in some situations but that markets can behave differently at different times and thus we need to develop a much better understanding of how the financial sector behaves in far from equilibrium situations such as during bubbles and how to build policy regimes and early warning systems that will help make future crises less frequent and /or less severe. 

In approaching such issues we draw heavily on nonlinear dynamics, the analysis of incentive structures and information flows in both the public and private sectors , the role of defective mental models, and on the emerging fields of behavioral and neuro economics and finance. Our research makes use of a wide range of methods including developing theory, conducting experiments in the lab, and undertaking both case studies and econometric work. A good deal of our research draws heavily on the data from our project on political economy and financial policy data. 


Angkinand, P. and Willett, T.D. (2006), “Exchange Rate Regimes and Banking Crises: The Channels of Influence Investigated”, International Journal of Finance and Economics (forthcoming).

Angkinand, P. and Willett, T.D. (2008), “Political Influences on the Costs of Banking Crises in Emerging Market Economies: Testing the U-Shaped Veto Player Hypothesis”, Macroeconomics and Finance in Emerging Market Economics, Volume 1, No.2, pp. 279-297. 

Angkinand, p., Chiu, E. and Willett, T.D. (2009), “Testing the Unstable Middle and Two Corners Hypotheses”, Open Economies Review, 20: 61-83. 

Angkinend, A., Wihlborg , C. and Willett, T.D. (2012), "Market Discipline for Financial Institutions and Markets for Information” in James Barth et al. (Eds), Research Handbook on Intertnational Banking and Governance, Edward Elgar, (forthcoming) 

Chiu, E. and Willett, T.D. (2009), “The Interactions of Strengths of Governments and Alternative Exchange Rate Regimes in Avoiding Currency Crises”, International Studies Quarterly, Volume 53, No.4, December 2009, pp. 1001-1025. 

Chiu, E. and Willett, T.D. (2010), “Capital Controls and Currency Crises: A More Disaggregated Political Economy Analysis”, presented at the annual meetings of the International Political Economy Society, Harvard University, November 12-13, 2010. 

Liang, P. and Willett, T.D. (2008), “Testing Four Strong Behavioral Hypotheses About the Effects of Asian and Russian Crises on Asian Financial Markets, Journal of Applied Business Economics, Volume 8, No.3, pp. 11-30. 

Walter, S. and Willett, T.D. (2012), “Delaying the Inevitable: A Political Economy Approach to Currency Defenses and Depreciation”, Review of International Political Economy (forthcoming).  

Willett, T.D. (2000), “International Financial Markets as Sources of Crisis or Discipline: The Too Much, Too Late Hypothesis”, Princeton Essays in International Finance

Willett, T.D. and Auerbach, N. (2009), “The Political Economy of Perverse Liberalization”, Korea’s International Financial Policies 

Willett, T.D., Budiman, A., Denzau, R., Jo, G.J., Ramos, C. and Thomas, J. (2004),   “The Falsification of Four Popular Hypotheses about International Financial Behavior during the Asian Crisis”, The World Economy, Vol. 27, Issue 1, pp. 25 – 44. 

Willett, T.D., Nitithanprapas, E., Nitithanprapas, I., and Rongala, S. (2003), “The Asian Crises Reexamined”, Asian Economic Papers, Vol. 3, No. 3, pp. 32 - 87. 

Willett, T.D., Chiu, E., Walton, J.C., and Walter, S. (2009), in Reinert, K.A., Rajan, R.S., Glass, J.A. and Davis, L.S. (Eds), The Princeton Encyclopedia of the World Economy, “Currency Crises”, pp. 245 – 253 

Willett, T.D. and Liang, P. (2009), “Contagion”, in Reinert, K.A., Rajan, R.S., Glass, J.A. and Davis, L.S. (Eds), The Princeton Encyclopedia of the World Economy, Princeton University Press, pp. 213 – 219. 

Willett, T.D., Auerbach, N., Kim, K., Kim, Y.M., Ouyang, A., Permpoon, O., Sompornserm, T., Srisorn, L. and Sula, O. (2009), The Global Financial Crisis and Korea’s International Financial Policies,Korean Economic Institute 

Willett, T.D. (2012), "The Role of Deficient Mental Models in Generating the Current Financial Crisis", Journal of Financial Economic Policy Vol 4, Issue 1, p. 3 

Willett, T.D., Wihlborg, C. and Zhang, N. (2010), “The Euro Debt Crisis: It isn’t just fiscal”, World Economics, Vol. 11, No.4. 

Willett, T.D., Liang, P. and Zhang, N. (2009), “The Slow Spread of the Global Financial Crisis”, Journal of International Commerce, Economics, and Policy Vol. 1, No.1, pp. 33-58. 

Willett, T.D. (2010), “George Soros’ Reflexivity, Complexity, and the Global Financial Crisis: A Review Essay.” World Economics,Vol 11, Number 2, 2010, pp. 207 - 214. 

Willett, T.D., Permpoon, O. and Srisorn, L. (2010) "Asian Monetary Cooperation: Perspectives from the European Experience and Optimum Currency Area Analysis”, Singapore Economic Review, Vol 55, Issue:1, March 2010. 

Willett, T.D., Liang, P. and Zhang, N. (2012), “Global Contagion and the Decoupling Debate” in Cheung, Y.W., Kakkar, V., and Ma, G. (Eds), The Evolving Role of Asia in Global Finance. Emerald Group Publishing, (forthcoming). 

Willett, T.D. (2010), “Some Lessons for Economists from the Financial Crisis.” Indian Growth and Development Review Vol. 3, No. 2, 2010: pp. 186-208. 

Willett, T.D. and Wihlborg, C. (2011), "Varities of European Crises", in Gerald Caprio (Ed), The Encyclopedia of Financial Globalization, (forthcoming) 

Willett, T.D. (2009), "The Role of Deficient Mental Models in Generating the Current Financial Crisis", Journal of Financial Economic Policy, (forthcoming)

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