Abstract
Recent research, both historical and contemporary, has broadened existing analyses of the connections between financial markets and macroeconomic conditions to encompass a broader menu of debt, credit and intermediation linkages between real and nominal variables. It is useful to distinguish two categories of contributions to this literature. In the first, which we label ‘bank failure’ explanations of cyclical fluctuations, one finds research linking bank failures, bank runs and other disturbances to the operation of financial intermediaries to fluctuations in output and employment. Bernanke’ s 1983 article on non-monetary effects of the financial crisis in the propagation of the Great Depression, emphasising the role of bank failures in disrupting financial intermediation and worsening the US depression, is an influential member of this school. 2 In the second category, which we label ‘debt-deflation’ theories, one finds studies seeking to establish the relevance for the business cycle of downward movements in asset and commodity prices, movements which, by affecting the net worth of non-financial borrowers, alter spending by households and firms . Calomiris and Hubbard’s 1989 article on the real effects of price-level movements in the postbellum USA is a leading example of this genre.3
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© 1997 Forrest Capie and Geoffrey E. Wood
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Eichengreen, B., Grossman, R.S. (1997). Debt-Deflation and Financial Instability: Two Historical Explorations. In: Capie, F., Wood, G.E. (eds) Asset Prices and the Real Economy. Studies in Banking and International Finance. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-25409-5_4
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DOI: https://doi.org/10.1007/978-1-349-25409-5_4
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