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Financial crises as herds: overturning the critiques

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  • V. V. Chari
  • Patrick J. Kehoe

Abstract

Financial crises are widely argued to be due to herd behavior. Yet recently developed models of herd behavior have been subjected to two critiques which seem to make them inapplicable to financial crises. Herds disappear from these models if two of their unappealing assumptions are modified: if their zero-one investment decisions are made continuous and if their investors are allowed to trade assets with market-determined prices. However, both critiques are overturned-herds reappear in these models-once another of their unappealing assumptions is modified: if, instead of moving in a prespecified order, investors can move whenever they choose.

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  • V. V. Chari & Patrick J. Kehoe, . "Financial crises as herds: overturning the critiques," Staff Report, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:316
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    References listed on IDEAS

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    1. Minneapolis Redux
      by Stephen Williamson in Stephen Williamson: New Monetarist Economics on 2013-12-23 04:47:00

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    Cited by:

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    2. Broner, Fernando A., 2008. "Discrete devaluations and multiple equilibria in a first generation model of currency crises," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 592-605, April.
    3. Levin, Dan & Peck, James, 2008. "Investment dynamics with common and private values," Journal of Economic Theory, Elsevier, vol. 143(1), pages 114-139, November.
    4. Lütje, Torben, 2004. "To Be Good or To Be Better: Asset Managers Attitudes Towards Herding," Hannover Economic Papers (HEP) dp-297, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    5. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126, Decembrie.
    6. Ms. Pritha Mitra, 2006. "Post-Crisis Recovery: When Does Increased Fiscal Discipline Work?," IMF Working Papers 2006/219, International Monetary Fund.
    7. Andrea Prat & Amil Dasgupta, 2005. "Reputation and Price Dynamics in Financial Markets," 2005 Meeting Papers 222, Society for Economic Dynamics.
    8. J L Ford & David Kelsey & W Pang, 2005. "Ambiguity in Financial Markets: Herding and Contrarian Behaviour," Discussion Papers 05-11, Department of Economics, University of Birmingham.

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