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Financial Crises as Herds: Overturning the Critiques

  • V. V. Chari
  • Patrick J. Kehoe

Financial 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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File URL: http://www.nber.org/papers/w9658.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9658.

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Date of creation: Apr 2003
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Publication status: published as Chari, V. V. and Patrick J. Kehoe. "Financial Crises As Herds: Overturning The Critiques," Journal of Economic Theory, 2004, v119(1,Nov), 128-150.
Handle: RePEc:nbr:nberwo:9658
Note: EFG IFM
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