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Fritz Breuss
Global Financial Crisis as a Phenomenon of Stock Market Overshooting
in: Gerhard Rünstler, Ewald Walterskirchen, Special Issue: The Aftermath of the Financial Crisis: Conference in Honour of Kurt W. Rothschild
Empirica, 2011, 38(1), S.131-152, http://www.springer.com/10663
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 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.
Keywords:Financial crisis, Open economy macroeconomics, Stock markets, Business cycles
Forschungsbereich:Makroökonomie und europäische Wirtschaftspolitik
Sprache:Englisch

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