The First Great Recession of the 21st Century

The First Great Recession of the 21st Century

Competing Explanations

Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo

The 2008–10 financial crisis and the global recession it created is a complex phenomenon that warrants detailed examination. The various essays in this book utilise several alternative paradigms to provide a plausible explanation and a credible cure. Great detail is given to this important analysis from different theoretical perspectives, presenting a clearer understanding of what went wrong and expounding misinterpretations of current theories and practices.

Chapter 9: Did Asset Prices Cause the Current Crisis?

Edith Skriner

Subjects: economics and finance, financial economics and regulation, history of economic thought


Edith Skriner 9.1 INTRODUCTION There is evidence that economic relationships change over time and therefore many researchers focus on these topics. During the oil shock years, a large number of studies dealt with the links between oil prices and economic output. In non-oil-producing economies a clear negative relationship between oil prices and aggregate measures of output and employment was found. In the recent past, the US dollar has frequently been used as the invoicing currency of international crude oil trading. Therefore, fluctuations in the US dollar exchange rate may be considered as one reason for the volatility of crude oil prices. In fact, researchers have identified a significant response of the oil price to an exchange rate shock. While the main concern of central bankers, the inflation rate, is now low and stable in the main developed economies, financial instability has become one of the most discussed issues. Recently, Austrian Business Cycle Theory, with Ludwig von Mises and Friedrich von Hayek as its main proponents, has gained much attention, as the 2008–09 crisis shows certain similarities with the Great Depression. Austrian theorists propose that the key cause of the Depression was the expansion of the money supply in the 1920s that led to an unsustainable credit-driven boom. Capital resources were misallocated into areas that would not attract investment at higher rates of borrowing. Prices increased and a correction occurred when the exponential credit creation could not be sustained. Then the money supply suddenly and sharply contracted when markets finally...

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