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On Economic Theory and Recovery of the Financial Crisis
Author(s) -
Yao Shujie,
Zhang Jing
Publication year - 2011
Publication title -
the world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/j.1467-9701.2011.01347.x
Subject(s) - economics , financial crisis , economic recovery , principal (computer security) , china , financial market , macroeconomics , monetary economics , finance , political science , computer science , law , operating system
This paper presents a new economic theory to explain the evolution of a financial crisis and why a major crisis may take a long time to recover. It suggests that asymmetric psychological reactions of market players to gains and losses are the principal cause of a crisis and responsible for prolonging recovery. Three different shapes of recovery, V, U and L, are defined and explained. During the current financial crisis, some countries such as China and India may have a V‐shaped recovery; others such as the UK and the US may have a U‐shaped recovery. An important policy implication is that effective macroeconomic policies should be designed to smooth market movements and implementation of such policies has to be countercyclical rather than pro‐cyclical.