Quotation Breuss, Fritz. 2011. Global financial crisis as a phenomenon of stock market overshooting. Empirica 38 (1): 131-152.


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Abstract

Inspired by Dornbusch's model of exchange rate overshooting we develop a theory of stock market behaviour and its impact on the real economy. 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. With our model we explain the genesis of the global financial crisis (GFC) 2008/2009 primarily as the result of a loose monetary policy in the USA. Following the overshooting and crash in the stock market the real economy dropped into a recession. After modelling the interaction of three markets with different speed of adjustment - money, stocks and goods - for a closed economy we expand it to an open economy and lastly study the spillovers of a financial market crisis between countries (from a large to a small country) by introducing the transmission channels of external trade or cross-border financial transactions. A long-lasting monetary easing as exhibiting by the Fed and the ECB since 2007 and 2008, respectively could - according to our model - generate another boom-bust cycle.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal Empirica
Language English
Title Global financial crisis as a phenomenon of stock market overshooting
Volume 38
Number 1
Year 2011
Page from 131
Page to 152
Reviewed? Y
URL http://www.springerlink.com/content/g012481g292m/

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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