A Contribution to the Theory of Financial Fragility and Crisis

Amit Bhaduri

Economics Working Paper Archive from Levy Economics Institute

Abstract: The paper examines three aspects of a financial crisis of domestic origin. The first section studies the evolution of a debt-financed consumption boom supported by rising asset prices, leading to a credit crunch and fluctuations in the real economy, and, ultimately, to debt deflation. The next section extends the analysis to trace gradual evolution toward Ponzi finance and its consequences. The final section explains the link between the financial and the real sector of the economy, pointing to an inherent liquidity problem. The paper concludes with comments on the interactions between the three aspects.

Keywords: Capital Gains; Consumer Debt; Debt-driven Fluctuations; Effective Demand; Financial Fragility; Liquidity Preference (search for similar items in EconPapers)
JEL-codes: D84 E12 E21 E32 E41 E44 E51 G12 G18 G24 N22 (search for similar items in EconPapers)
Date: 2010-05
New Economics Papers: this item is included in nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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