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The Global Economic System: How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises by Anders L. Sjöman, Hans Gunawan, Carolyn L. Evans, George Chacko

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Chapter 4. Japan’s Lost Decade

In this chapter, we turn to illustrating another historical economic crisis: the liquidity-shock induced recession suffered by Japan during the 1990s, sometimes referred to as Japan’s “Lost Decade.”1 Just as we did when we looked at the Great Depression in Chapter 3, we’ll first review our general framework on how a liquidity shock leads to changes in the behavior of individuals and financial institutions and to negative effects on real economic activity, before we discuss actual events.

4.1 The Stages of a Liquidity Shock—Revisited and Expanded

The flowchart in Figure 4.1 provides a more abbreviated version of the stages of a liquidity shock and the resulting economic downturn that we discussed in Chapter 3, “The ...

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