Quotation Breuss, Fritz. 2009. The Financial Crisis as an Overshooting Phenomenon. WIFO Working Papers, Nr. 336, April 2009.


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Abstract

Inspired by Dornbusch’s model of exchange rate overshooting we develop a theory of stock market behaviour. The idea is that stock market prices overshoot and undershoot their long-run equilibrium values which are determined by the development in the real economy. The overshooting is fuelled 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 with different speeds of adjustment. The goods market slowly adjusts relative to the money and the asset 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 United States and spreading its recession-plagued effects all over to the world economy. The model focuses primarily on the monetary interpretation of the present crisis leaving aside the complex interactions of the real estate bubble in the USA, followed by the innovation of new financial instruments which were sold all over the world, hoping to disperse the risks involved with it. Nor does this model deal with the institutional aspects of the financial crisis (the failed behaviour of banks, the banking crises, unregulated financial markets etc.). These are questions of better international regulation of the financial industry touched upon by the G20 summit in London.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Working/discussion paper, preprint
Language English
Title The Financial Crisis as an Overshooting Phenomenon
Title of whole publication WIFO Working Papers, Nr. 336, April 2009
Year 2009
URL http://www.wifo.ac.at/wwa/jsp/index.jsp?fid=23923&id=35621&typeid=8&display_mode=2

Associations

People
Breuss, Fritz (Details)
Organization
Institute for International Economics IN (Details)
Europainstitut (Badinger) (Former organization)
Research areas (ÖSTAT Classification 'Statistik Austria')
5115 European integration (Details)
5300 Economics (Details)
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