Breuss, Fritz. 2011. Global financial crisis as a phenomenon of stock market overshooting. Empirica 38 (1): http://www.springerlink.com/content/240r3tq22485713n/.
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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 over-shooting 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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Status of publication | Published |
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Affiliation | WU |
Type of publication | eJournal article |
Journal | Empirica |
Citation Index | SSCI |
Language | English |
Title | Global financial crisis as a phenomenon of stock market overshooting |
Volume | 38 |
Number | 1 |
Year | 2011 |
Reviewed? | Y |
URL | http://www.springerlink.com/content/240r3tq22485713n/ |
Associations
- People
- Breuss, Fritz (Details)
- Organization
- Department of Economics (Badinger) (Details)
- Europainstitut (Badinger) (Former organization)
- Research areas (Ă–STAT Classification 'Statistik Austria')
- 5115 European integration (Details)
- 5300 Economics (Details)