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A Contribution to the Theory of Financial Fragility and Crisis

Author

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  • Amit Bhaduri

Abstract

Three interrelated aspects typical of most financial crisis of domestic origin are brought together in a model in this paper. The first aspect is debt financed consumption boom supported by rising asset prices which ultimately leads to credit crunch and debt deflation as lenders lose confidence in borrowers. This is related to the second aspect tracing gradual evolution towards Ponzi finance. This is accompanied by fragility of the financial sector itself and its insolvency as an inevitable outcome of unregulated economic expansion. The paper concludes with comments on how these three aspects interact in the real world of possible extensions.

Suggested Citation

  • Amit Bhaduri, 2010. "A Contribution to the Theory of Financial Fragility and Crisis," wiiw Working Papers 65, The Vienna Institute for International Economic Studies, wiiw.
    • Handle: RePEc:wii:wpaper:65
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    File URL: https://wiiw.ac.at/a-contribution-to-the-theory-of-financial-fragility-and-crisis-dlp-2128.pdf
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    Citations

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    Cited by:

    1. Hein, Eckhard, 2011. "Distribution, 'financialisation' and the financial and economic crisis: Implications for post-crisis economic policies," IPE Working Papers 09/2011, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

    More about this item

    Keywords

    capital gains; consumers' debt; debt-driven fluctuations; effective demand; financial fragility; liquidity preference;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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