What is it about?
Journal of Finance published a paper by Allen and Gale on "Optimal Financial Crisis". The paper is technically correct but it is misleading. Our paper shows why this is so.
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Why is it important?
The financial crisis in and around 2007 in USA (and elsewhere) was disastrous. One question that arises is - what was the economics profession doing before the crisis? Well, the literature included papers like "Optimal financial crises" (Allen and Gale, 1998, J. of Finance). It is interesting that the literature now hardly considers such papers. Our paper was critical of this literature well before the crisis hit the US economy and other economies.
Perspectives
The paper "Optimal financial crises" (Allen and Gale, 1998, J. of Finance) assumes that the economy-wide returns on risky assets are not verifiable. Based on this, "interesting" results are derived. The key result is that financial crisis can be optimal. Our paper takes a very, very close look at the whole thing.
Gurbachan Singh
Read the Original
This page is a summary of: Bank Runs, Lender of Last Resort, Suspension of Convertibility, and Enabling Laws, Journal of Emerging Market Finance, January 2007, SAGE Publications,
DOI: 10.1177/097265270700600104.
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