A MODEL OF INTERACTION BETWEEN THE VIRTUAL AND THE REAL ECONOMY

Amit Bhaduri, Kazimierz Laski and Martin Riese ()

Metroeconomica, 2006, vol. 57, issue 3, 412-427

Abstract: This paper demonstrates through a formal model how the wealth effect created by a stock market boom leads to the expansion of demand and output mostly through debt‐financed private consumption. However, inherent in this expansion is the threat of a subsequent contraction caused by the rising burden of servicing debt and falling creditworthiness. The formal analysis captures more precisely these conditions; it shows that, even in the medium run, the growth rates of the wealth in the stock market and of the real economy may move in opposite directions.

Date: 2006
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https://doi.org/10.1111/j.1467-999X.2006.00247.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:metroe:v:57:y:2006:i:3:p:412-427

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