A Simple Model of the Financial Crisis of 2007-9 with Implications for the Design of a Stimulus Package
The financial crisis of 2007-09 began as a local problem in the mortgage finance market in the United States and Europe but, within months, escalated into a general global financial crisis, resulting in collapsing investment not just in developed nations but also in Shanghai, Rio and Mumbai, and has led to a general recession worldwide. The paper builds a rational-expectations, microeconomic model of why the local crisis escalated into a general freeze in credit flows. It then isolates two very different kinds of interventions needed to restore the economy back to health, arguing that government stimulus policy has not had enough impact because a failure to understand the need for the dual intervention.
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.:
- David Easley & Maureen O'Hara, 2009. "Ambiguity and Nonparticipation: The Role of Regulation," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1817-1843, May.
- John Moore & Nobuhiro Kiyotaki, .
1995-5, Edinburgh School of Economics, University of Edinburgh.
- Lindbeck, Assar & Nyberg, Sten & Weibull, Jörgen W., 1997.
"Social Norms and Economic Incentives in the Welfare State,"
Working Paper Series
476, Research Institute of Industrial Economics.
- Assar Lindbeck & Sten Nyberg & Jšrgen W. Weibull, 1999. "Social Norms And Economic Incentives In The Welfare State," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 1-35, February.
- Christopher Mayer & Karen Pence & Shane M. Sherlund, 2009.
"The Rise in Mortgage Defaults,"
Journal of Economic Perspectives,
American Economic Association, vol. 23(1), pages 27-50, Winter.
- Roger E. A. Farmer, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 357-358, 09.
- George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
- Jack Boorman, 2009. "The Current Financial Crisis," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 1(2), pages 127-135, May.
- Haselmann, Rainer & Pistor, Katharina & Vig, Vikrant, 2006.
"How Law Affects Lending,"
157, University Library of Munich, Germany.
- Karen M. Pence, 2006. "Foreclosing on Opportunity: State Laws and Mortgage Credit," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 177-182, February.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Bhaduri, Amit, 1977. "On the Formation of Usurious Interest Rates in Backward Agriculture," Cambridge Journal of Economics, Oxford University Press, vol. 1(4), pages 341-52, December.
- Ricardo J. Caballero & Alp Simsek, 2009. "Complexity and Financial Panics," NBER Working Papers 14997, National Bureau of Economic Research, Inc.
- Besley, T. & Coate, S., 1990.
"Understanding Welfare Stigma: Taxpayer Resentment And Statistical Discrimination,"
42, Princeton, Woodrow Wilson School - Discussion Paper.
- Besley, Timothy & Coate, Stephen, 1992. "Understanding welfare stigma: Taxpayer resentment and statistical discrimination," Journal of Public Economics, Elsevier, vol. 48(2), pages 165-183, July.
- Marcellus Andrews, 2009. "Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, by George A. Akerlof and Robert J. Shiller," Challenge, M.E. Sharpe, Inc., vol. 52(5), pages 126-131, September.
- Joshua Coval & Jakub Jurek & Erik Stafford, 2009. "The Economics of Structured Finance," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 3-25, Winter.
- Cynthia Harter, 2009. "Review of "Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism"," International Review of Economic Education, Economics Network, University of Bristol, vol. 8(1), pages 155-157.
- Basu, Kaushik, 2003.
"Globalization and the Politics of International Finance: The Stiglitz Verdict,"
03-04, Cornell University, Center for Analytic Economics.
- Kaushik Basu, 2003. "Globalization and the Politics of International Finance: The Stiglitz Verdict," Journal of Economic Literature, American Economic Association, vol. 41(3), pages 885-899, September.
- Hyun Song Shin, 2009. "Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 101-19, Winter.
- José Antonio Ocampo, 2009. "Latin America and the global financial crisis," Cambridge Journal of Economics, Oxford University Press, vol. 33(4), pages 703-724, July.
When requesting a correction, please mention this item's handle: RePEc:ess:wpaper:id:2179. 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: (Padma Prakash)
If references are entirely missing, you can add them using this form.