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Leverage and asset bubbles: averting armageddon with chapter 11?
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Miller, Marcus and Stiglitz, Joseph (2010) Leverage and asset bubbles: averting armageddon with chapter 11? Economic Journal, Vol.120 (No.544). pp. 500-518. doi:10.1111/j.1468-0297.2010.02357.x ISSN 0013-0133.
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Official URL: http://dx.doi.org/10.1111/j.1468-0297.2010.02357.x
Abstract
An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to 'overshoot' equilibrium when an asset bubble bursts - threatening widespread insolvency and what Richard Koo calls a 'balance sheet recession'. Besides interest rates cuts, asset purchases and capital restructuring are key to crisis resolution. The usual bankruptcy procedures for doing this fail to internalise the price effects of asset 'fire-sales' to pay down debts, however. We discuss how official intervention in the form of 'super' Chapter 11 actions can help prevent asset price correction causing widespread economic disruption.
Item Type: | Journal Article | ||||
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Subjects: | H Social Sciences > HC Economic History and Conditions | ||||
Divisions: | Faculty of Social Sciences > Centre for the Study of Globalisation and Regionalisation | ||||
Journal or Publication Title: | Economic Journal | ||||
Publisher: | Wiley-Blackwell Publishing Ltd. | ||||
ISSN: | 0013-0133 | ||||
Official Date: | May 2010 | ||||
Dates: |
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Volume: | Vol.120 | ||||
Number: | No.544 | ||||
Number of Pages: | 19 | ||||
Page Range: | pp. 500-518 | ||||
DOI: | 10.1111/j.1468-0297.2010.02357.x | ||||
Status: | Peer Reviewed | ||||
Publication Status: | Published | ||||
Access rights to Published version: | Restricted or Subscription Access | ||||
Description: | Also circulated as CEPR discussion paper no.DP7469 and NBER working paper no.15817. |
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