Animal Spirits, Financial Crises and Persistent Unemployment*. (26th April 2013)

• Record Type: Journal Article
• Authors: Farmer, Roger E.A.
• Is Part Of: Economic journal. Volume 123:Number 568(2013)
• Page Start: 317
• Page End: 340
• Publication Date: 2013-04-26
• Subjects: Economics -- Periodicals; Économie politique -- Périodiques; 330.05
• DOI: 10.1111/ecoj.12028
• Languages: English
• ISSNs: 0013-0133

Abstract

<abstract abstract-type="main" id="ecoj12028-abs-0001"> <title> <x xml:space="preserve">Abstract</x> </title> <p>This article uses a rational expectations model with multiple equilibrium unemployment rates to explain financial crises. The model has equilibria where asset prices are unbounded above. I argue that this is an important feature of any rational‐agent explanation of a financial crisis, since for the expansion phase of the crisis to be rational, investors must credibly believe that asset prices could keep increasing forever with positive probability. I explain the sudden crash in asset prices that precipitates a financial crisis as a large shock to expectations that leads to a permanent increase in the unemployment rate.</p> </abstract>