A Contribution to the Theory of Financial Fragility and Crisis

Levy Economics Institute, Working Papers Series

24 Pages Posted: 15 May 2010

Date Written: May 12, 2010

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

JEL Classification: D84, E12, E21, E32, E41, E44, E51, G12, G18, G24, N22

Suggested Citation

Bhaduri, Amit, A Contribution to the Theory of Financial Fragility and Crisis (May 12, 2010). Levy Economics Institute, Working Papers Series, Available at SSRN: https://ssrn.com/abstract=1605151 or http://dx.doi.org/10.2139/ssrn.1605151

Amit Bhaduri (Contact Author)

Jawaharlal Nehru University

Vasant Vihar
Jawaharlal Nehru University
New Delhi, DE Delhi
India

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