Working Paper: NBER ID: w9658
Authors: V. V. Chari; Patrick J. Kehoe
Abstract: Financial crises are widely argued to be due to herd behavior. Yet recently developed models of herd behavior have been subjected to two critiques which seem to make them inapplicable to financial crises. Herds disappear from these models if two of their unappealing assumptions are modified: if their zero-one investment decisions are made continuous and if their investors are allowed to trade assets with market-determined prices. However, both critiques are overturned---herds reappear in these models---once another of their unappealing assumptions is modified: if, instead of moving in a prespecified order, investors can move whenever they choose.
Keywords: No keywords provided
JEL Codes: E32; F2; F32; F4; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| modifying the assumption of exogenous timing (C41) | herds reappear (C92) |
| continuous investment decisions (G11) | herds emerge (C92) |
| discrete investment decisions (G11) | herds do not occur (C92) |
| information costs and investment decisions (G11) | inefficient market outcomes (D61) |