Large increase in credit is used to fund purchases of

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Unformatted text preview: (P↓). •  The government may force financial ins9tu9ons to purchase them. •  As P↓, the financial ins9tu9ons’ balance sheets will be deteriorated and thus their lending will contract. •  Related to a foreign exchange crisis. 11 Dynamics of U.S. Financial Crises •  Stage 1: Ini9a9on of Financial Crisis –  Mismanagement of financial liberaliza=on / innova=on –  Asset price boom and bust –  Increases in uncertainty •  Stage 2: Banking Crisis •  Stage 3: Debt Defla9on 12 Sequence of Events in U.S. Financial Crises Deteriora9on in Financial Ins9tu9ons’ B/S Asset Price Decline Increases in Uncertainty Adverse Selec9on and Moral Hazard Problems Worsen Stage 1: Ini9a9on of Financial Crisis Stage 2: Banking Crisis Stage 3: Debt Defla9on Economic Ac9vity Declines Banking Crisis Unexpected Decline in Price Level 13 Stage 1: Mismanagement of Financial Innova9on •  Financial innova9on typically has a dark side… If managed improperly, it can lead financial ins9tu9on to take on exces...
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This note was uploaded on 02/02/2013 for the course ECON 2035 taught by Professor Stahl during the Fall '08 term at LSU.

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