Quotation Breuss, Fritz. 2009. The Financial Crisis as an Overshooting Phenomenon. The 3rd All China Economics (ACE) International Conference, Hong Kong, China, 14.12.-16.12.2009.


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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 triggered 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 stock 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. Due to the globalized financial investment business the US crisis spread over to the whole world, primarily to Europe and Asia. 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 and governance of the financial industry dealt with under the auspices of the G20 for the world economy and by the European Commission and the Council for the European Union.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Paper presented at an academic conference or symposium
Language English
Title The Financial Crisis as an Overshooting Phenomenon
Event The 3rd All China Economics (ACE) International Conference
Year 2009
Date 14.12.-16.12.2009
Country China
Location Hong Kong
URL http://www.cb.cityu.edu.hk/research/apec/ace/

Associations

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