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Joseph Schumpeter Lecture The Great Moderation, The Great Panic, and The Great Contraction

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  • Charles Bean

Abstract

This lecture examines the causes of the recent financial crisis and subsequent recession. On the macroeconomic side, the Great Moderation encouraged an overly optimistic assessment of risk. Combined with low interest rates, reflecting both loose monetary policy and relatively high Asian savings rates, that encouraged a build-up of excessive leverage in the banking system. On the microeconomic side, distorted incentives led to a concentration and mispricing of risk. Informational complexities associated with new financial assets and the interconnectedness of financial institutions then resulted in the closure of funding markets and a flight to safety when loan defaults rose unexpectedly. The episode indicates the need to focus on agency and information problems between banks and their funders in addition to those between the banks and their borrowers. It also suggests that the process of financial intermediation should play a more prominent role in macroeconomic models. (JEL: E32, E44, E52, E58, F32, G01, G21) (c) 2010 by the European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 8 (2010)
Issue (Month): 2-3 (04-05)
Pages: 289-325

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Handle: RePEc:tpr:jeurec:v:8:y:2010:i:2-3:p:289-325

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Cited by:
  1. Grydaki, Maria & Bezemer, Dirk J., 2012. "The Role of Credit in Great Moderation: a Multivariate GARCH Approach," MPRA Paper 39813, University Library of Munich, Germany.
  2. Giovanni Melina & Stefania Villa, 2013. "Fiscal Policy and Lending Relationships," IMF Working Papers 13/141, International Monetary Fund.
  3. Qin, Duo & He, Xinhua, 2012. "Globalisation effect on inflation in the great moderation era: New evidence from G10 countries," Economics Discussion Papers 2012-56, Kiel Institute for the World Economy.
  4. Tiziana Assenza & Michele Berardi & Domenico Delli Gatti, 2011. "Was Bernanke Right? Targeting Asset Prices may not be a Good Idea after all," CESifo Working Paper Series 3641, CESifo Group Munich.
  5. Bezemer, Dirk J & Grydaki, Maria, 2012. "Mortgage Lending and the Great moderation: a multivariate GARCH Approach," MPRA Paper 36356, University Library of Munich, Germany.
  6. Mohammed Dore & Roelof Makken & Erik Eastman, 2013. "The Monetary Transmission Mechanism, Non-residential Fixed Investment and Housing," Atlantic Economic Journal, International Atlantic Economic Society, vol. 41(3), pages 215-224, September.

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