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A Model Of Interaction Between The Virtual And The Real Economy

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  • Amit Bhaduri
  • Kazimierz Laski
  • Martin Riese

Abstract

This paper demonstrates through a formal model how the wealth effect created by a stock market boom leads to the expansion of demand and output mostly through debt‐financed private consumption. However, inherent in this expansion is the threat of a subsequent contraction caused by the rising burden of servicing debt and falling creditworthiness. The formal analysis captures more precisely these conditions; it shows that, even in the medium run, the growth rates of the wealth in the stock market and of the real economy may move in opposite directions.

Suggested Citation

  • Amit Bhaduri & Kazimierz Laski & Martin Riese, 2006. "A Model Of Interaction Between The Virtual And The Real Economy," Metroeconomica, Wiley Blackwell, vol. 57(3), pages 412-427, July.
    • Handle: RePEc:bla:metroe:v:57:y:2006:i:3:p:412-427
    DOI: 10.1111/j.1467-999X.2006.00247.x
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    References listed on IDEAS

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    4. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
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