Financial Crises as Herds: Overturning the Critiques
AbstractFinancial crises are widely argued to be due to herd behavior. Yet recently developed models of herd behavior have been subjected to two critiques which seem to make them inapplicable to financial crises. Herds disappear from these models if two of their unappealing assumptions are modified: if their zero-one investment decisions are made continuous and if their investors are allowed to trade assets with market-determined prices. However, both critiques are overturned---herds reappear in these models---once another of their unappealing assumptions is modified: if, instead of moving in a prespecified order, investors can move whenever they choose.
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Date of creation: Apr 2003
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- Chari, V. V. & Kehoe, Patrick J., 2004. "Financial crises as herds: overturning the critiques," Journal of Economic Theory, Elsevier, vol. 119(1), pages 128-150, November.
- V. V. Chari & Patrick J. Kehoe, 2003. "Financial crises as herds: overturning the critiques," Staff Report 316, Federal Reserve Bank of Minneapolis.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- F2 - International Economics - - International Factor Movements and International Business
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-31 (All new papers)
- NEP-DGE-2004-08-31 (Dynamic General Equilibrium)
- NEP-FIN-2004-08-31 (Finance)
- NEP-FMK-2003-04-27 (Financial Markets)
- NEP-MAC-2003-04-27 (Macroeconomics)
- NEP-SEA-2004-08-31 (South East Asia)
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