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It's Not OverStructural Drivers of the Global Economic Crisis$
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Rohit

Print publication date: 2013

Print ISBN-13: 9780198088417

Published to Oxford Scholarship Online: January 2013

DOI: 10.1093/acprof:oso/9780198088417.001.0001

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The Wealth Effect

The Wealth Effect

Chapter:
(p.65) 5 The Wealth Effect
Source:
It's Not Over
Author(s):

Rohit

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198088417.003.0005

Chapter 5 modifies Steindl’s model to include of wealth-induced consumption of the capitalists which counteracts the tendency of underconsumption in the short run. While the tendency towards stagnation (as a result of both underconsumption and underinvestment) could exist, there are ways to inflate capitalists’ expenditure through sources outside of current demand which will help avert this problem in the short run. This external impetus can be provided by bubbles in asset price markets which generate wealth effects on capitalists’ consumption. Short run dynamics shows that if the wealth effect is stronger than the effects of underconsumption and underinvestment, the economy faces a boom which can last as long as the asset market is booming. Just the opposite would follow when the asset market goes bust. This asset market could be of any asset, including non-financial assets like housing.

Keywords:   capitalists’ consumption, speculation, wealth effect, irrational exuberance, boom, asset markets

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