A Simple Model of the Financial Crisis of 2007-9 with Implications for the Design of a Stimulus Package
AbstractThe financial crisis of 2007-09 began as a local problem in the mortgage finance market in the United States and Europe but, within months, escalated into a general global financial crisis, resulting in collapsing investment not just in developed nations but also in Shanghai, Rio and Mumbai, and has led to a general recession worldwide. The paper builds a rational-expectations, microeconomic model of why the local crisis escalated into a general freeze in credit flows. It then isolates two very different kinds of interventions needed to restore the economy back to health, arguing that government stimulus policy has not had enough impact because a failure to understand the need for the dual intervention.
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Date of creation: Aug 2009
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United states; financial crisis; recession; multiple equilibria; credit markets; credit ratings; mortgage finance; finance; Mumbai; developed nations; Shanghai; Rio; microeconmic; economy; health; government; credit; investment; market;
Other versions of this item:
- Basu, Kaushik, 2009. "A Simple Model of the Financial Crisis of 2007-9 with Implications for the Design of a Stimulus Package," Working Papers 09-11, Cornell University, Center for Analytic Economics.
- NEP-ALL-2009-08-30 (All new papers)
- NEP-FDG-2009-08-30 (Financial Development & Growth)
- NEP-MAC-2009-08-30 (Macroeconomics)
- NEP-PKE-2009-08-30 (Post Keynesian Economics)
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