An Expectations-Driven Interpretation of the "Great Recession"

Christopher Gunn and Alok Johri

No 13-02, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: The boom-years preceding the "Great Recession" were a time of rapid innovation in the financial industry. We explore the idea that both the boom and eventual bust emerged from overoptimistic ex-pectations of efficiency-gains in the financial sector. We treat the bankruptcy costs facing intermediaries in a costly state verification problem as a stochastic process, and model the boom-bust in terms of an unfulfilled news-shock where the expected fall in costs are eventually not realized. In response to a change in expectations only, the model generates a boom-bust cycle in aggregate activity, asset pricesand leverage, and a countercyclical credit spread.

Keywords: expectations-driven business cycles; intermediation shocks; news shocks; great recession; financial accelerator (search for similar items in EconPapers)
JEL-codes: E3 E44 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-02-21
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (13)

Published: Carleton Economic Papers

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Journal Article: An expectations-driven interpretation of the “Great Recession” (2013)
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