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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 examines three aspects of a financial crisis of domestic origin. The first section studies the evolution of a debt-financed consumption boom supported by rising asset prices, leading to a credit crunch and fluctuations in the real economy, and, ultimately, to debt deflation. The next section extends the analysis to trace gradual evolution toward Ponzi finance and its consequences. The final section explains the link between the financial and the real sector of the economy, pointing to an inherent liquidity problem. The paper concludes with comments on the interactions between the three aspects.

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    File URL: http://www.levyinstitute.org/pubs/wp_593a.pdf
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    Bibliographic Info

    Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_593.

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    Date of creation: May 2010
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    Handle: RePEc:lev:wrkpap:wp_593

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    Web page: http://www.levyinstitute.org

    Related research

    Keywords: Capital Gains; Consumer Debt; Debt-driven Fluctuations; Effective Demand; Financial Fragility; Liquidity Preference;

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    Cited by:
    1. Hein, Eckhard, 2011. "Distribution, 'financialisation' and the financial and economic crisis: Implications for post-crisis economic policies," IPE Working Papers 09/2011, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

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