Bubbles and crises

Franklin Allen, Douglas Gale

    Research output: Contribution to journalArticle

    Abstract

    In recent financial crises a bubble, in which asset prices rise, is followed by a collapse and widespread default. Bubbles are caused by agency relationships in the banking sector. Investors use money borrowed from banks to invest in risky assets, which are relatively attractive because investors can avoid losses in low payoff states by defaulting on the loan. This risk shifting leads investors to bid up the asset prices. Risk can originate in both the real and financial sectors. Financial fragility occurs when positive credit expansion is insufficient to prevent a crisis.

    Original languageEnglish (US)
    Pages (from-to)236-255
    Number of pages20
    JournalEconomic Journal
    Volume110
    Issue number460
    DOIs
    StatePublished - Jan 2000

    ASJC Scopus subject areas

    • Economics and Econometrics

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  • Cite this

    Allen, F., & Gale, D. (2000). Bubbles and crises. Economic Journal, 110(460), 236-255. https://doi.org/10.1111/1468-0297.00499