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A Model Of Interaction Between The Virtual And The Real Economy

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  • Amit Bhaduri
  • Kazimierz Laski
  • Martin Riese

Abstract

This paper demonstrates through a formal model how the wealth effect created by a stock market boom leads to the expansion of demand and output mostly through debt-financed private consumption. However, inherent in this expansion is the threat of a subsequent contraction caused by the rising burden of servicing debt and falling creditworthiness. The formal analysis captures more precisely these conditions; it shows that, even in the medium run, the growth rates of the wealth in the stock market and of the real economy may move in opposite directions. Copyright � 2006 The Authors; Journal compilation � 2006 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Metroeconomica.

Volume (Year): 57 (2006)
Issue (Month): 3 (07)
Pages: 412-427

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Handle: RePEc:bla:metroe:v:57:y:2006:i:3:p:412-427

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