Opments i shall argue that it is difficult to

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Unformatted text preview: nt economic developments. opments. I shall argue that it is difficult to understand why either the significant decline in house prices since 2006 or the substantial losses sustained by financial firms should have so seriously affected aggregate employment and economic activity except in the context of a model in which financial intermediaries play a crucial role and in which their ability to fulfill that function can at some times be signifi significantly impaired. Housing Prices and Aggregate Demand While While the severity of the recent financial crisis has been extensively discussed, some have questioned whether it was really the primary cause of the Great Recession. For example, Baker (2010) argues that a substantial reduction in aggregate demand can be explained as a wealth effect on consumer expenditure, given the decline in U.S. households’ housing wealth by several trillion dollars. In this analysis, “the problem is not first and foremost a financial crisis.” But as Buiter (2010) points out, there there is no aggregate wealth effect of a decline in housing prices, since the household hold sector in aggregate is both the owner of the housing stock and the consum...
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This note was uploaded on 11/23/2013 for the course ECON 11837649 taught by Professor Batchelder during the Spring '10 term at Pepperdine.

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