Abstract
Starting with the ‘Great Moderation’ in the mid-1980s, five phenomena have influenced and characterized economic conditions and financial markets, especially in developed markets: Low and constant inflation rates.1 Strong and persistent money growth and the unprecedented access companies, financial investment firms and ordinary people have to borrowing and foreign exchange.2 Massive increases in world trade, financial globalization and international capital flows.3 Large asset price swings and an increased number of financial crises.4 Reduced output volatility.5
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Notes
- 1.
For an overview, see, for example, The Economist (2007, p. 4), which shows the reduced median and variation for inflation across 13 industrialized countries.
- 2.
Rees (2009, p. 1) calculated that between 1980 and 2007 global liquidity increased tenfold while nominal gross domestic product (GDP) ‘only’ grew sixfold. Accordingly, excess liquidity accounts for 65% of economic output.
- 3.
Evans and Hnatkovska (2005, p. 1) point out that gross capital flows between developed economies rose by 300% during the 1990s alone compared to a 63% increase in trade flows and 26% for real GDP. See also Hau and Rey (2004, p. 126), who find that gross cross-border flows based on bond and equity transactions in the United States of America (US) were equivalent to only 4% of GDP in 1975, 100% in the early 1990s and increased to 245% by 2000.
- 4.
Bordo et al. (2001, pp. 56–57) show that the chance of suffering a currency crisis, banking crisis or twin crisis in a given year has more than doubled for the period 1973 to 1997 compared to during the Bretton Woods and the gold standard periods.
- 5.
See Kohn (2008, p. 5).
- 6.
Farmer (2009, pp. 14–17) provides a methodological description of the self-fulfilling behavior of stock markets in the context of a labor market model.
- 7.
It could be argued that these connections are especially strong during bubbles. However, it might only be the intensity that varies. In addition, stock market behavior over the last 25 years is characterized by long boom and bust phases.
- 8.
See also Reinhart and Rogoff (2009, pp. 4–10) and Helbling and Terrones (2003, pp. 69–70) for consequences of stock market and real estate busts for the real economy.
- 9.
For an overview of the transmission mechanism theories, which include equity prices, see Mishkin (1995, pp. 5–9).
- 10.
In this case, financial market depth means the ratio of a country’s financial assets to its GDP.
- 11.
See, for example, Adalid and Detken (2007, p. 6).
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Wiedmann, M. (2011). Introduction. In: Money, Stock Prices and Central Banks. Contributions to Economics. Physica, Heidelberg. https://doi.org/10.1007/978-3-7908-2647-0_1
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DOI: https://doi.org/10.1007/978-3-7908-2647-0_1
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