The Financial Crisis as a Stock Market Overshooting Phenomenon: A Theoretical Analysis
Inspired by Dornbusch's model of exchange rate overshooting we develop a theory of stock market behaviour. The idea is that stock prices overshoot and undershoot their long-run equilibrium values which are determined by the development in the real economy. The overshooting is triggered primarily by a loose monetary policy. The simple macro model consists of three markets the money market, the stock market and the goods market interacting at different speeds of adjustment. The goods market slowly adjusts relative to the money and the stock market. This model can explain some of the major features of the global financial crisis, having its origin in the loose monetary policy in the USA. The three-market model could also help to understand the emergence and consequences of the subprime crisis in the US housing market. Due to the globalised financial investment business the US crisis spread across the whole world, especially Europe and Asia.
Volume (Year): 82 (2009)
Issue (Month): 12 (December)
|Contact details of provider:|| Postal: |
Phone: (+43 1) 798 26 01-0
Fax: (+43 1) 798 93 86
Web page: http://www.wifo.ac.at/
More information through EDIRC
|Order Information:|| Postal: Austrian Institute of Economic Research Publikationsverkauf und Abonnentenbetreuung Arsenal, Objekt 20 A-1030 Vienna/Austria|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carmen M. Reinhart & Kenneth S. Rogoff, 2014.
"This Time is Different: A Panoramic View of Eight Centuries of Financial Crises,"
Annals of Economics and Finance,
Society for AEF, vol. 15(2), pages 1065-1188, November.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers 595, China Economics and Management Academy, Central University of Finance and Economics.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
- Zeeman, E. C., 1974. "On the unstable behaviour of stock exchanges," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 39-49, March.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973, April.
- Monacelli, Tommaso, 2009.
"New Keynesian models, durable goods, and collateral constraints,"
Journal of Monetary Economics,
Elsevier, vol. 56(2), pages 242-254, March.
- Monacelli, Tommaso, 2006. "New Keynesian Models, Durable Goods and Collateral Constraints," CEPR Discussion Papers 5916, C.E.P.R. Discussion Papers.
- Nobuhiro Kiyotaki & John Moore, 1995.
NBER Working Papers
5083, National Bureau of Economic Research, Inc.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
- Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
- Fritz Breuss & Serguei Kaniovski & Margit Schratzenstaller, 2009. "Macro-economic Effects of the Fiscal Stimulus Measures in Austria," Austrian Economic Quarterly, WIFO, vol. 14(4), pages 205-216, November.
When requesting a correction, please mention this item's handle: RePEc:wfo:monber:y:2009:i:12:p:933-941. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ilse Schulz)
If references are entirely missing, you can add them using this form.