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A contribution to the theory of financial fragility and crisis

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  • Amit Bhaduri
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    Abstract

    The paper outlines formally three interrelated facets of a financial crisis of domestic origin: (i) a debt financed consumption boom supported by rising asset prices that ends in debt deflation; (ii) a related process of financial evolution of economic agents towards Ponzi finance; (iii) resulting systemic illiquidity afflicting the financial sector as a prelude to crisis. Being placed in relation to theories of exogenous and endogenous money, the models indicate how the co-evolution of the real and the financial sector results in financial fragility of different types. The paper explores formally the specific features of the fragility of various episode of crisis, which share a common pattern of gradual build up followed by a sudden collapse of financial confidence through the interaction between the real and the financial sector, and concludes with implications for policy. Copyright The Author 2011. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/cje/ber011
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    Bibliographic Info

    Article provided by Oxford University Press in its journal Cambridge Journal of Economics.

    Volume (Year): 35 (2011)
    Issue (Month): 6 ()
    Pages: 995-1014

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    Handle: RePEc:oup:cambje:v:35:y:2011:i:6:p:995-1014

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    Cited by:
    1. Eugenio Caverzasi, 2012. "From the Financial Instability Hypothesis to the theory of Capital Market Inflation: a structural interpretation of the sub-prime crisis," DEM Working Papers Series 018, University of Pavia, Department of Economics and Management.
    2. Thomas Goda, 2013. "The role of income inequality in crisis theories and in the subprime crisis," Working Papers PKWP1305, Post Keynesian Economics Study Group (PKSG).
    3. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.

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