Premium
ECONOMIC CRISES, HOUSING PRICE BUBBLES AND SADDLE‐POINT ECONOMICS
Author(s) -
Christiaans Thomas
Publication year - 2013
Publication title -
metroeconomica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.256
H-Index - 29
eISSN - 1467-999X
pISSN - 0026-1386
DOI - 10.1111/meca.12004
Subject(s) - economics , robustness (evolution) , interpretation (philosophy) , rational expectations , normative , stabilization policy , point (geometry) , macroeconomics , microeconomics , monetary policy , biochemistry , chemistry , philosophy , epistemology , computer science , gene , geometry , mathematics , programming language
Starting from the recent financial and economic crisis the standard interpretation of rational expectations and optimal control dynamic models is called into question referring to its lack of robustness. Using the example of the housing market it is shown that an alternative interpretation closer to the mathematical basics would imply economies much more crisis‐prone than they actually are. Market frictions reduce chances for bubbles and should be taken into consideration in positive as well as in normative economics. Dynamic models in a neoclassical spirit can explain reality only with frictions, and increasing frictions may sometimes be a reasonable stabilizing instrument of economic policy.