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Order, displacements and recurring financial crises

  • Hoffmann, Andreas
  • Urbansky, Björn

The paper describes boom-and-bust cycles within Hayek's framework of order and aims to provide an understanding of recurring crises in recent financial history. We argue that a boom-and-bust cycle is initiated by a displacement that lowers the degree of (ex-post) plan coherence (or order) in an economy. Such displacements can be endogenous (e.g. innovations) or exogenous (e.g. policy alteration). A cycle can be triggered if the displacement signals high short-run profit opportunities but agents lack an understanding of the long-run impact of the displacement and cannot form coherent expectations. The application of the framework aims at making sense of recurring financial crises since the break-down of the Bretton Woods System. First, we argue that the newly emerging international financial architecture has made the financial system more elastic. Second, we show how large exogenous displacements such as capital account liberalization inititated boom-and-bust cycles in developing countries. And third, we argue that the competitive market system themselves brought about many innovations that endogenously amplified the latest US boom-and-bust cycle and increased the crisis potential.

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Paper provided by University of Leipzig, Faculty of Economics and Management Science in its series Working Papers with number 108.

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Date of creation: 2012
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Handle: RePEc:zbw:leiwps:108
Contact details of provider: Postal: Marschnerstraße 31, 04109 Leipzig
Web page: http://www.wifa.uni-leipzig.de/en/dekanat.html

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  1. Benson, B.L., 1996. "The Evolution of Commercial Law," Working Papers 1996_09_04, Department of Economics, Florida State University.
  2. Reinhart, Carmen M & Reinhart, Vincent R, 1999. "On the Use of Reserve Requirements in Dealing with Capital Flow Problems," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 27-54, January.
  3. Andreas Hoffmann & Gunther Schnabl, 2009. "A Vicious Cycle of Manias, Crashes and Asymmetric Policy Responses - An Overinvestment View," CESifo Working Paper Series 2855, CESifo Group Munich.
  4. Lewis, Paul, 2012. "Emergent properties in the work of Friedrich Hayek," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 368-378.
  5. Koppl, Roger & Yeager, Leland B., 1996. "Big Players and Herding in Asset Markets: The Case of the Russian Ruble," Explorations in Economic History, Elsevier, vol. 33(3), pages 367-383, July.
  6. Paul S. Mills & John Kiff, 2007. "Money for Nothing and Checks for Free; Recent Developments in U.S. Subprime Mortgage Markets," IMF Working Papers 07/188, International Monetary Fund.
  7. William Butos & Roger Koppl, 1993. "Hayekian expectations: Theory and empirical applications," Constitutional Political Economy, Springer, vol. 4(3), pages 303-329, September.
  8. 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.
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