What caused the global financial crisis?

This paper discusses the probable causes of the global financial crisis of 2007–2009 suggested in the literature: (i) lax regulation and a lack of regulatory oversight leading to risky financial innovations; (ii) a global savings glut and capital inflow bonanzas into the advanced countries, especially in response to the financial crises in developing countries from 1994 to 1998; (iii) loose monetary policy of the US Federal Reserve and the European central banks in the 1990s and early 2000s; and (iv) a growing over-optimism and neglect of risk in the face of rising asset prices, following the era of the “great moderation” characterized by inflation and output growth stability since the 1980s. The paper offers suggestions on possible directions for future research.