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

  • Orlowski, Lucjan T.

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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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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  1. 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.
  2. 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.
  3. Hui Tong & Shang-Jin Wei, 2008. "Real Effects of the Subprime Mortgage Crisis; Is it a Demand or a Finance Shock?," IMF Working Papers 08/186, International Monetary Fund.
  4. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
  5. L. Randall Wray, 2008. "Financial Markets Meltdown: What Can We Learn from Minsky," Economics Public Policy Brief Archive ppb_94, Levy Economics Institute.
  6. Danielle DiMartino & John V. Duca, 2007. "The rise and fall of subprime mortgages," Economic Letter, Federal Reserve Bank of Dallas, vol. 2(nov).
  7. 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).
  8. Hyman P. Minsky & L. Randall Wray, 2008. "Securitization," Economics Policy Note Archive 08-2, Levy Economics Institute.
  9. 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.
  10. Buiter, Willem H., 2007. "Lessons from the 2007 Financial Crisis," CEPR Discussion Papers 6596, C.E.P.R. Discussion Papers.
  11. 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.).
  12. 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.
  13. 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.
  14. 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).
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