Thursday, April 8, 2010

Booms slow and crashes fast

We crash much more efficiently than we boom. Kling suspects the cause may be related to money as he explains in the Peso problem.

But money adapts fast, that is the whole utility of money, and credit. It is a lightweight good on purpose, so it can adapt to expected changes in real goods production. Hence, the question needs more depth.

But not much more. Crashes are sudden because the economy moves to a known equilibrium, a version of production known from recent history. So the firms and the households know how to deflate. Booms are caused by utilizing new technology, but the technology is new and has no historical reference.

Klings fundamental insight seems correct, asymmetry is fundamental to any economic theory.

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