Wednesday, July 11, 2018

Bubble-ology: "A Crisis of Beliefs"

Beliefs caused the credit bubble and subsequent bust (slides on the 2008 Financial Crisis)

  1. Excess optimism, excess lending and investment 
  2. Correction of expectations (due to bad news or waning of optimism) 
  3. Recession (impaired intermediation or excess pessimism) 

==>Crises are due to non-rational beliefs, which may be amplified by traditional mechanisms.

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