Financial crises as herds: Overturning the critiques

V. V. Chari, Patrick J. Kehoe

Research output: Contribution to journalArticlepeer-review

78 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)128-150
Number of pages23
JournalJournal of Economic Theory
Volume119
Issue number1 SPEC. ISS.
DOIs
StatePublished - Nov 2004

Bibliographical note

Funding Information:
We thank Susan Athey, Abhijit Banerjee, Sushil Bikhchandani, Harold Cole, David Levine, George Mailath, Enrique Mendoza, Stephen Morris, Andrew Postlewaite, Hyun Shin, and an anonymous referee for useful comments. We thank Kathy Rolfe for editorial assistance. We thank the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

Keywords

  • Capital flows
  • Financial collapse
  • Information cascades

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