Financial Crises as Herds: Overturning the Critiques

34 Pages Posted: 27 Apr 2003 Last revised: 30 Apr 2003

See all articles by Varadarajan V. Chari

Varadarajan V. Chari

University of Minnesota - Twin Cities - Department of Economics; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Patrick J. Kehoe

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2003

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.

Suggested Citation

Chari, Varadarajan V. and Kehoe, Patrick J., Financial Crises as Herds: Overturning the Critiques (April 2003). NBER Working Paper No. w9658. Available at SSRN: https://ssrn.com/abstract=398561

Varadarajan V. Chari

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
1108 Management & Economics
Minneapolis, MN 55455
United States
612-626-7151 (Phone)

Federal Reserve Bank of Minneapolis ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Patrick J. Kehoe (Contact Author)

Federal Reserve Bank of Minneapolis - Research Department ( email )

90 Hennepin Avenue
Minneapolis, MN 55480
United States
612-204-5525 (Phone)
612-204-5515 (Fax)

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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