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Stages of the 2007/2008 Global Financial Crisis Is There a Wandering Asset-Price Bubble?

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  • Orlowski, Lucjan T.

Abstract

This study identifies five distinctive stages of the current global financial crisis: the meltdown of the subprime mortgage market; spillovers into broader credit market; the liquidity crisis epitomized by the fallout of Northern Rock, Bear Stearns and Lehman Brothers with counterparty risk effects on other financial institutions; the commodity price bubble, and the ultimate demise of investment banking in the U.S. The study argues that the severity of the crisis is influenced strongly by changeable allocations of global savings coupled with excessive credit creation, which lead to over-pricing of varied types of assets. The study calls such process a “wandering asset-price bubble”. Unstable allocations elevate market, credit and liquidity risks. Monetary policy responses aimed at stabilizing financial markets are proposed. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2008-43.

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Date of creation: 2008
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Handle: RePEc:zbw:ifwedp:7464

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Keywords: Subprime mortgage crisis; credit crisis; liquidity crisis; market risk; credit risk; default risk; counterparty risk; Basel II;

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  1. Hui Tong & Shang-Jin Wei, 2008. "Real Effects of the Subprime Mortgage Crisis: Is it a Demand or a Finance Shock?," NBER Working Papers 14205, National Bureau of Economic Research, Inc.
  2. Danielle DiMartino & John V. Duca & Harvey Rosenblum, 2007. "From complacency to crisis: financial risk taking in the early 21st century," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(dec).
  3. Orlowski, Lucjan T., 2008. "Relative inflation-forecast as monetary policy target for convergence to the euro," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1061-1081.
  4. Buiter, Willem H, 2007. "Lessons from the 2007 Financial Crisis," CEPR Discussion Papers 6596, C.E.P.R. Discussion Papers.
  5. Stephen P. A. Brown & Raghav Virmani & Richard Alm, 2008. "Crude awakening: behind the surge in oil prices," Economic Letter, Federal Reserve Bank of Dallas, vol. 3(may).
  6. Svensson, Lars E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Seminar Papers 646, Stockholm University, Institute for International Economic Studies.
  7. L. Randall Wray, 2008. "Financial Markets Meltdown: What Can We Learn from Minsky," Economics Public Policy Brief Archive ppb_94, Levy Economics Institute.
  8. Danielle DiMartino & John V. Duca, 2007. "The rise and fall of subprime mortgages," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(nov).
  9. Hui Tong & Shang-Jin Wei, 2008. "Real Effects of the Subprime Mortgage Crisis," IMF Working Papers 08/186, International Monetary Fund.
  10. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1990. "Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation," NBER Working Papers 3250, National Bureau of Economic Research, Inc.
  11. Paul Mizen, 2008. "The credit crunch of 2007-2008: a discussion of the background, market reactions, and policy responses," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 531-568.
  12. Michael Woodford, 2007. "The Case for Forecast Targeting as a Monetary Policy Strategy," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 3-24, Fall.
  13. Ben S. Bernanke, 2008. "Economic outlook and financial markets: testimony before the Committee on the Budget, U.S. House of Representatives, October 20, 2008," Web Site 37, Board of Governors of the Federal Reserve System (U.S.).
  14. Hyman P. Minsky & L. Randall Wray, 2008. "Securitization," Economics Policy Note Archive 08-2, Levy Economics Institute.
  15. Stevans, Lonnie & Sessions, David, 2008. "Speculation, Futures Prices, and the U.S. Real Price of Crude Oil," MPRA Paper 9456, University Library of Munich, Germany, revised 04 Jul 2008.
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Cited by:
  1. Hubert Gabrisch & Lucjan T. Orlowski, 2010. "Interest Rate Convergence in Euro-Candidate Countries: Volatility Dynamics of Sovereign Bond Yields," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 46(6), pages 69-85, November.
  2. Pusch, Toralf, 2012. "The role of uncertainty in the euro crisis: A reconsideration of liquidity preference theory," Discussion Papers 31, University of Hamburg, Centre for Economic and Sociological Studies (CESS/ZÖSS).
  3. Gabrisch, Hubert & Orlowski, Lucjan T. & Pusch, Toralf, 2012. "Sovereign default Risk in the Euro-Periphery and the Euro-Candidate Countries," MPRA Paper 41265, University Library of Munich, Germany.
  4. Block, Joern & Sandner, Philipp & De Vries, Geertjan, 2010. "Venture capital and the financial crisis: an empirical study across industries and countries," MPRA Paper 20287, University Library of Munich, Germany.
  5. Orlowski, Lucjan T., 2012. "Financial crisis and extreme market risks: Evidence from Europe," Review of Financial Economics, Elsevier, vol. 21(3), pages 120-130.

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