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82 Seiten, Note: 1,0
List of Equations
List of Figures
List of Tables
2. Theoretical background
2.1 Art as an investment object
2.1.1 Integration of art as an asset into investment portfolios
2.1.2 Art market composition and key players in the global art trade
2.2 Primary features of business cycle
2.2.1 Moving from a stationary to a booming economy
2.2.2 Looming recession and financial crises
2.3 Can prices at art auctions be used to predict shifts in the business cycle?
2.3.1 Classical versus growth cycle analysis
2.3.2 Art prices as business cycle indicator: direction and timing
3.1 Data and summary statistics
3.2 Analysis of stationarity and data filtering
3.2.1 Stationarity - Augmented Dickey Fuller (ADF) test
3.2.2 Applying the Hodrick Prescott filter
3.3 Cross-correlation with GDP
3.4 Granger Causality and analysis of stability
3.4.1 Granger Causality
3.4.2 Analysis of stability
Equation 1: Dickey Fuller test
Equation 2: Augmented Dickey Fuller test
Equation 3: HP filter time series decomposition
Equation 4: HP filter minimization problem
Equation 5: HP filter first order condition
Equation 6: HP filter trend component
Equation 7: HP filter cyclical component
Equation 8: Sample cross-covariance
Equation 9: Sample cross-correlation
Equation 10: Granger causality VAR
Equation 11: Granger causality VAR first differences
Equation 12: Restricted VAR
Equation 13: F-test
Equation 14: QLR test
Figure 1: Business cycle pattern
Figure 2: Demand and supply price of capital assets
Figure 3: Mr.Housing Bubble
Figure 4: U.S. real GDP and its cyclical fluctuations
Figure 5: Growth rate U.S. Composite Leasing Inidcators (MEI) & nom. GDP
Figure 6: Time series line plots real quarterly AMR indices in U.S. Dollar
Figure 7: Cyclical components (HP filtered) AMR data and NBER turning dates
Table 1: Summary statistics of macroeconomic variables 1976-2013
Table 2: Business cycle dates NBER
Table 3: ADF-test results log-time series
Table 4: ADF-test results differenced series
Table 5: Cross-correlations cyclical components 1976-2013
Table 6: Cross-correlations HP filtered art price inflation 1976-2013
Table 7: Granger-causality F-test
Table 8: Break dates QLR test
“When bankers get together for dinner, they discuss Art. When artists get together for dinner they discuss money” (Oscar Wilde)
Works of art are unique and highly heterogeneous but if they are traded, they share the common purpose of creating income. However, not only artists will discuss money at dinner, also bankers while they discuss art, are likely to talk about financial gains through investments in art. In economics a small group of researchers has examined whether this kind of investment is profitable or not. Although findings are not consistent, some authors conclude that art, compared to equity or bonds, does perform relatively well and offers diversification benefits in investment portfolios. Despite the inconsistency of findings, this research has led to a growing interest in art investment. Promoters of art investment like art investment funds work on a transformation of art into a new and widely accepted asset class, which they hope will prospectively be included in investment portfolios in the same way as real estate (Picinati di Torcello (2012): 15).
Investment in art is determined by the expected price appreciation of art works in the future (Stein (1977): 1021). The quantity of original artworks, at least by deceased artists, cannot be augmented and the elasticity of supply is zero (Baumol (1986): 10). The future prices of art works as investment goods will thus depend on demand as well as on wealth of individuals and institutions at the sales date (Goetzmann (1993): 1371). The greater the purchasing power of prospective buyers, the more art is being bought and the higher art prices will be (Goetzmann et al. (2009): 2). Consequently art prices are expected to react to changes in economic prosperity and to fluctuate in the course of the business cycle.
Business cycle research is a vital branch of macroeconomics and many theories and studies exist which examine the boom and bust periods of the economy as different phases of business cycles. Contrary there is little research which looks at “the link between the art market and the broader economy” (ibid: 4).This master thesis aims at contributing insights on this link by analysing the behavior of art prices under different macroeconomic conditions. Precisely, the objective is to assess the characteristics of art prices as business cycle indicator for the U.S. economy. Since buying art for its potential gain value has become more attractive, art prices might behave like asset prices which to some extent lead the economic development (IMF (2000): 96p.). The question this master thesis addresses is whether art prices then contain information about future economic development. Thus the following research question will be answered:
Can prices at art auctions be used to predict shifts in the business cycle?
The focus on prices at art auctions arises from the fact that they offer the only reliable data source of art market prices. Since sales of art are also organised through art dealers, who do not publicise their sales prices, a considerable fraction of the art market is not covered. Nonetheless art auctions account for more than 50 percent of art transactions (Campbell (2008): 65) and thus play a vital role in the art market. Moreover this thesis will concentrate on prices of fine art paintings since these prices capture high attention by researchers and investors. Various art styles and different nationalities of painters will be considered.
This master thesis is organized as follows: Chapter 2 lays the theoretical foundation. In chapter 2.1 the transformation of art into an asset including a short summary of return risk characteristics of paintings will be depicted and an overview of the art market will be given. Chapter 2.2 offers a recently revived explanation of the business cycle by Hyman P. Minsky (2008) and will give a brief overview of different types of financial crises following Reinhart and Rogoff (2009). The explanation of classical business versus growth cycles, as different methodologies of assessing business cycles, and the description of the main features of business cycle indicators follows in chapter 2.3. Thereby the role of art prices as business cycle indicator will be hypothesised by referring to findings of related literature.
Chapter 3 will explain in detail and apply different econometric models and discuss results. The application and selection of these models is orientated towards Stock and Watson (1999, 2012) who examine a great variety of indicator variables in U.S. business cycles. Following these authors and to empirically investigate business cycles, besides art prices some key macroeconomic variables will be analysed in their function as business cycle indicators. In chapter 3.1 the data, its transformation and some summary statistics will be given. Issues of stationarity and the application of the time series filter by Hodrick and Prescott (1997) are subjects of chapter 3.2. Chapter 3.3 will look at cross-correlations between cyclical components of GDP and art prices as well as some key macroeconomic variables. Chapter 3.4 will apply a common approach to causality in economics proposed by Granger (1969, 1980) and will review if art prices Granger-cause GDP. In chapter 4 findings will be concluded and an answer to the research question of this master thesis will be given.
In this chapter the role of art as an asset will be discussed and an overview over the global art market will be given. In 2.1.1 the transformation of art into an asset, its properties as an asset and its increasing integration into investment portfolios will be analysed. In 2.1.2 the structure of the art market will be shown and key players in the art trade will be presented.
Theodor W. Adorno was a German intellectual who discussed the role of art, in its manifold forms, in what he called the culture industry of capitalist economies. Before art turned into a commodity, traded in the art market, it was created on order following the immediate taste of the financier (Grimm (2009): 65). Adorno does not criticise the commodity character of art as such, since through its trade in the art market, the artist is freed from the constraint to produce for an immediate interest, as is the case for commissioned art (ibid: 66). However in the culture industry, art works are certainly unquestioningly commodities and their autonomy is eliminated because they are produced on profit motives only, for consumer groups whose needs are formed by the culture industry (ibid & Adorno (1977): 338). An example of differences between commissioned and profit art can be seen in two different epochs of figurative art, neoclassicism and pop art.
One distinguished representative of neoclassicism is Jacques-Louis David who lived from 1748 till 1825. Famous works by him are the Death of Marat and Napoleon at the Saint Bernard Pass. Although at his time an art market already existed in Europe (Towse (2010): 66), he served as government painter under Napoleon I. who “admired (his works) […] and saw possibilities for self-aggrandizement in the talent displayed” (McMullen (2014)). By contrast the famous pop artist Andy Warhol, who lived from 1928 to 1987 and painted the Campbell’s Soup Cans amongst others, completely internalised and thereby revealed the mechanisms of the culture industry:
“Business art is the step that comes after Art. I started as a commercial artist, and I want to finish as a business artist. After I did the thing called ‘art’ or whatever it’s called, I went into business art.” (Warhol (1977): 92)
Warhol and artists who followed him, aimed at using the market to attract consumers of art way beyond the art galleries (Hamburger Kunsthalle (2010)). For 25000 dollar for example he painted a portrait on a 40x40 inch canvas for anybody. Although a portrait means commissioned art, he worked highly profit oriented and “usually painted more than one canvas of his clients if he thought there was a chance he could sell them more than one. The second canvas cost $15,000, the third, $10,000, the fourth, $5,000” (Bockris (2003): 378). Adorno and Horkheimer (1988) in this context argue that in the culture industry art works lose authenticity and their aura, the latter representing uniqueness and distinctiveness (ibid: 128). This process is promoted by the technical reproducibility of art, which has been performed extensively by Pop artists. According to Adorno (1975) there is no active dispute with art works in the culture industry, rather an over-stimulation (ibid: 29).
Today this “intimate relationship between art and business” (Sassower & Cicotello (2000): 78) as expressed by Warhol, can also be found in art investment. Business art, in the meaning of doing business with art, is a phenomenon which attracts attention by investors who wish to integrate art works into investment portfolios to diversify risks and maximize profits. Thereby no limitation to the epoch or type of an art work exists and its return/risk performance is an important determinant driving the investment decision. A study by Capgemini and Meerill Lynch (2011) estimates that 42 percent of high net worth individuals are likely to invest in art primarily due to its potential gain in value (ibid: 20). In economics a diverse literature exists which mainly focuses on paintings and analyses their properties and performance as investment goods. This research follows the literature and concentrates on paintings.
When paintings are bought for investment purposes they are capital assets since owners expect capital gains out of financial appreciation (Stein (1977): 1027). Paintings are relatively illiquid, only a portion of stock of paintings are sold during a period (McAndrew (2012): 92) and resale of art works may take many years (Baumol (1986): 11). Pesando (1993) analyses the market for prints which are technical reproductions of original paintings in editions of up to 100 or more (Pesando (1993): 1075). These prints are augmentable, on the contrary, the elasticity of supply of originals from deceased artists is zero (Baumol (1986): 10). Originals of masters are highly heterogeneous and unique (McAndrew (2012): 92) whereby the name of the artists influences the monetary value of a painting (Ginsburgh et al. (2005): 15). The future sales price of paintings as investment goods will thus “depend upon both the number of people who wish to buy the work of art when it is put up for sale and the wealth of the individual or institutions who desire it at that time” (Goetzmann (1993): 1371).
Naturally changes in taste can occur in the course of time which poses a risk for the value of art investment:
“Turner, who for a while was a leader of the British art world, is said later to have become an embarrassment to the Tate gallery because of the large collection of his works stored in their cellars; though they are now among the most valued items in the museum’s collection. “ (Baumol (1986): 14)
Other risks include the loss or destruction of a painting, so a risk premium must be subtracted from its rate of return (ibid: 12).
Fluctuations in the rate of return being a financial uncertainty are among the most important risks investors face in their investment decision. Economic research on this issue finds heterogeneous results. The results are obtained by predominantly focusing on auction sales of paintings at UK (London) and US (New York) auction houses which till today are major art markets. The dealer market gets left out due to non-availability of data which is problematic since depending on estimates it makes about 30 to 50 percent of the whole market (Campbell (2008): 65). Out of auction sales records, many different indices are created comprising different time periods, time horizons and frequencies. A variety of methods are used to generate these indices whereby the most frequently applied methods are repeated-sales regressions, hedonic regressions, geometric means and average prices. Moreover each index includes different artists with choices being representative but nonetheless highly subjective. All this generates non-compliance between the return characteristics of paintings:
Baumol (1986) analyses 640 transactions between 1652 and 1961 and finds that the real annual compounded rate of return on investment in paintings is low at 0.5 percent; additionally returns exhibit a great variance yielding in numerous cases negative returns.
Goetzmann (1993) calculations of return characteristics indicate that in the period 1850 to 1986 paintings exceeded capital gains of stocks and bonds. Although painting prices grew at an annualized nominal rate of 6.2 percent, due to the pronounced fluctuations of painting prices and additionally due to their high positive correlation with stocks, a risk-averse investor “would typically not find art to be an attractive purchase for investment purposes alone” (ibid: 1370).
Pesando (1993) finds that prints between 1977 and 1992 had an annualized mean real return of 1.5 percent which was lower than returns on stocks, bonds or Treasury bills but had a similar degree of risk as stocks and bonds by means of standard deviations.
Mei and Moses (2002a) for the period 1950 to 1999 get a real annual compounded return on paintings of 8.2 percent, which in their data is similar to stocks but outperforms corporate and government bonds as well as Treasury bills. They confirm that painting prices are volatile having higher standard deviations compared to stocks, bonds or Treasury bills. Furthermore for the above period they get a correlation coefficient of 0.04 between real returns of art and stocks which suggests that art “may play a somewhat more important role in portfolio diversification” (ibid: 1663). At the same time for an extended time period of 1875 to 1999 they find that their art index and the S&P 500 index tend to move in the same direction.
Campbell (2008) examines the return on paintings from 1980 to 2006 and gets an annual real return of 6.6 percent and due to low correlations of returns of art with other asset classes ”the author finds opportunities for portfolio diversification across art markets and across asset classes” (ibid: 64). She indicates that the volatility of painting prices varies among smoothed and desmoothed indices, with the latter showing a substantial risk increment.
Summarizing these findings there is no clear tendency of whether or not art investment is lucrative. What this research and art indices certainly have provoked, is a growing interest in art investment. Art investment promoters by tendency quote results which underline the chances art investment poses to an investor. A good example is given by a leading wealth management consulting group, which resumes the chances of art investment as highly promising:
“Beside the aesthetic return generated by art, there are good reasons to consider art as a new asset class. Art is attractive from a financial investment point of view over the long run as it is a store of value that generates moderate positive real return. Art has also a low correlation with stocks and bonds which offer diversification possibilities over time and across the business cycle” (Picinati di Torcello (2012): 23)
“[…] one could wonder if art could be poised for a similar transformation to what happened to real estate 40 years ago. Real estate is today a widely accepted investment class, accessible to a large community, and is commonly included in portfolios for diversification purposes” (ibid: 15)
Art market promoters thus aim at making art investment a widely accepted asset class. Efforts by promoters also focus on a diversification of art investment. The development of art funds represents such efforts. In the following chapter these funds and other relevant facts of the art market will be briefly discussed.
The art market, as market for visual art, is divided into a primary and a secondary market. In the primary market art works of contemporary artists are bought and sold whereby selling happens mostly through art dealers or artists themselves (Towse (2010): 77). Art works of unknown and established artists are sold for the first time (Heilbrun & Gray (2004):169). The prices set by the sellers to a buyer “may rely on a ‘feel for the market’ or use such rule-of-thumb practices as ‘markup pricing’” (ibid: 170). Having a feel of the market means basing decisions on past experiences, on comparison of similar art works and on knowledge of buyer’s preferences; markup pricing means setting the price above production costs (ibid).
The secondary market is the more relevant market for art investment and thus this research will concentrate on it. In this market works of mostly deceased but to some extent also contemporary artists are sold by their owners at art auctions, at art sales or through private art dealers (Towse (2010): 78). The prices of art works thereby depend on what buyers, such as art dealers, private buyers, businesses, funds or museums, are willing to pay (ibid). Buyers and sellers in the secondary market have much more information about the artists and their works whereas the purchase of art by renowned artists is less risky than of unknown artists (Heilbrun & Gray (2004): 171). Moreover information costs have been reduced recently and prices are no longer subject to private information (ibid: 172).
Regarding sales of art in the secondary market, art dealers compete with auction houses. Art dealers buy but also sell art and so “provide essential liquidity to the market” (Horvitz (2009): 105). Many dealers have public galleries which are open to clients, others work privately on appointment at home or at a private office (ibid: 104). Another distribution channel for dealers is given by art fairs. Although dealers have to pay high fees to participate in them, they are important because they enable them to sell art but also to acquire new contacts through marketing (Bryce (2007): 115). To spread risks or required capital and to extent the sale to a greater number of clients, art dealers often cooperate with each other and own art works together (Horvitz (2009): 105). While sales of art works between dealers are rarely known, the opposite is true for auctioning results of fine art. Auction prices are available to the public and reliable (Mei & Moses (2006): 2411).
Today the auction market for art and other collectibles is dominated by two auction companies: Sotheby’s and Christie’s act as duopoly and have branches in many different countries; nonetheless a significant part of the market is also represented by other smaller auction houses at regional level (ibid). The method used at art auctions is typically the English auction “where the price is raised until only a single bidder remains” (Heilbrun & Gray (2004): 172). Many art works sold at auction have reserve prices as minimum prices which are commonly set at 60 to 80 percent of the low estimate (Mei & Moses (2006): 2412). Sellers have to pay a commission fee of roughly 5 percent to the auction house (Towse (2010): 79). Buyers at auction will have to pay a fee of 20 percent of the first 100000 dollar and 12 percent for values above this sum, so that auction houses profit from high auction results (Mei & Moses (2006): 2412). If the hammer price does not reach the reserve price the art works are not sold and said to be bought in (ibid: 2413).
As has been mentioned buyers of art can be categorized into several categories. All buyers of art have in common that they collect art, invest in it or do both (Didier (2009): 3). But with an increase in prices (see chapter 3.1), more buyers are “much more likely to make potential profit part of their decision” (Grant (2013)). Pure collectors of art are less likely to be influenced by return and risk characteristics of art works (Frey (2013): 172). Private collectors are often highly attached to their art works thus reluctant sellers and are willing to pay a lot of money for art works they want to include in their collection and which “to some extent are public reflections of their selves” (Horvitz (2009): 103). Museums are much like private collectors; they are hesitant when it comes to selling art works, they also focus on certain pieces, following the taste of the curator of collections, and sometimes pay premium prices which is partly due to their inert purchasing processes (ibid: 103p.). But a distinctive feature is that a museums’ collection is often extended by donors, which leads to a significant increase in its value (Heilbrun & Gray (2004): 199).
A pure investor in art will be solely concerned with financial risks as well as the returns out of art investment and will buy and hold art works out of the belief that it “will benefit by long-term inflation, a diminishing supply, an upward change of attribution, or a coming change in taste” (Horvitz (2009): 107). Needless to say many investors are also influenced by the aesthetic value of art. But compared to collectors, private investors are not likely to overpay for an art work, contrary to dealers, they do not have the same distribution channels and will have longer holding periods of art works (ibid). This is sensible since transaction costs will decline with a longer holding period.
Art investment funds are an example of pure investment in art. They increasingly started to operate from the beginning of the 2000s and function like private equity funds (Robertson & Chong (2008): 20). With the money provided by investors, the managers of funds purchase different art works and aim at selling them with a profit in the medium term (ibid). Another possibility to invest in art funds is to contribute a privately owned art work with the aim “to exchange full ownership of art for partial ownership of a large pool of assets (as art works)” (Graham (2014): 325). Investors will additionally have to pay a management fee of 2 percent over the assets and will have to disclaim 20 percent of annual profits (Velthuis & Color (2012): 477). Moreover investors are committed to contribute capital to the fund over a period of 3 to 5 years (ARTFA (2014)).
Finally businesses are also buyers of art. Either a corporation has its own art collection or a member of the corporation buys art as decoration whereby it “is now de rigueur for major office buildings to decorate their lobbies with large-scale expensive works of contemporary art” (Horvitz (2009): 104, italics in original). Many corporations also fund expositions of their art in museums or public galleries. The most famous and biggest corporate art collection is owned by the Deutsche Bank in Germany (Roberston & Chong (2008): 12).
The art market is a global market in which the demand for art comes from buyers of different nationalities. Demand for fine art is driven by the rich and very rich and shows pretty well in which countries wealth is increasing. The art market had two boom periods (see chapter 3.1): The first boom was in the late 1980s driven by strong demand from Japanese customers who, with a booming Japanese economy, accumulated considerable wealth. Moreover the “Yen had appreciated significantly against the dollar […] making paintings relatively much cheaper for Japanese buyers versus their US competitors” (McAndrew (2012): 84). With the sudden contraction of the Japanese economy in 1991 also the art market collapsed (ibid: 85).
The second boom prior to the world financial crisis in 2008 was boosted significantly by the Chinese who, due to the performance of the Chinese economy, have increased wealth and are nowadays among the most important buyers in the art market (ibid: 101). Contrary to the first contraction after 1991, the art market seems to recover much faster from the 2008 crisis although the situation remains tense (see figure 5). Other smaller but also powerful customers originate from emerging economies such as Russia or India, but unlike China these countries have not been able to develop a significant national art market (ibid: 80).
Regarding international art markets, in the second half of the 20th century the U.S and the UK were the most important art markets, with New York and London as hot spots of global art trade (ibid: 68). Data for the period 1990 to 2000 indicates a global art market share by the U.S. and the UK of roughly 50 and 26 percent respectively (ibid: 69). During the last decade things have changed: China has become a new important player in the global art trade and a serious competitor to the U.S. and the UK. While in 2002 China had a global art market share of 1 percent (ibid.), in 2013 this number increased to 24 percent placing China ahead of the UK with a 20 percent market share and behind the U.S. with a 38 percent market share (McAndrew (2014): 22). Considering fine art sales in 2013, with prices exceeding 50000 dollar, the difference between China and the U.S. in the market share by value is much smaller with a 32 versus 38 percent share respectively (ibid: 33). The UK share for fine art in 2013 by value was “only” 19 percent (ibid). Summarizing these findings, the art market is a global market which is dominated by the U.S. but is also significantly influenced by the UK and recently China.
“The United States and all other modern industrial economies experience significant swings in economic activity. In some years, most industries are booming and unemployment is low; in other years, most industries are operating well below capacity and unemployment is high” (Romer (2008)).
As Romer (2008) concludes the economic activity of developed economies varies substantially with time. These recurrent changes in the performance of the economy are termed as business cycles. No empirical evidence exists to investigate the business cycle as a whole; rather it is detected through fluctuations of various macroeconomic time series (Mitchell (1966): 2). “Business cycles are more or less regular patterns in fluctuations of macroeconomic variables” (Bonenkamp et al (2001): 2p.), where expansions, disemboguing in a peak, are followed by contractions, leading to a slump after which a new revival can be witnessed and so on. What makes business cycles special is that these fluctuations are broadly spread over the economy whereby it becomes apparent that modern economies are “a system of closely interrelated parts” (Burns (1951): 3).
Figure 1: Business cycle pattern
illustration not visible in this excerpt
Figure 1 shows a simplified depiction of these ups and downs in the economic performance. The reality is of course much more complex and despite the similar pattern of business cycles these do not occur periodically (Burns & Mitchell (1964): 3). Moreover each business cycle has a unique length and magnitude. Depending on the business cycle theory, the length of a business cycle differs. Burns and Mitchel (1964) set the minimum length at more than a year (ibid), which is reasonable in order to distinguish business cycles from short term fluctuations like seasonal changes. The business cycle chronology by NBER (see chapter 3.1) depicts a maximum length of business cycles of more than 10 years. A business cycle is always composed of an expansion and a contraction period whereby there “is no convention as to which comes first, the expansion or the recession” (Kacapyr (1996): 19).
The upcoming subchapters will discuss business cycles, analysing their primary causes. In the economic research on business cycles many different explanations are given, nonetheless two fundamentally different approaches can be distinguished: one group of researchers see the economy “as being inherently stable but shocked by outside forces” (Hall (1990): 10) and thus propose that exogenous factors cause business cycles. A famous representative of this group of researchers is W.S. Jevons, who asserts that fluctuations in the harvest, through different rain cycles, cause business cycles (Hansen (1953): 212). The other group of researchers however suggests that endogenous variables lead to business cycles. For them the instability of the economy is primarily not resulting from outside shocks but contrary is given by its own nature and mechanisms within the system (Minsky (2008): 192). Comparing both groups, nowadays endogenous business cycle theories outweigh.
In 2.2.1 the expansion and in 2.2.2 the contraction sequences of a business cycle will be examined from an endogenous perspective. The financial instability hypothesis by Minsky (2008) will be briefly explained to show the underlying mechanisms and interrelations of economic processes. His theory focuses on the expansion period of the business cycle and related processes within a single country. To examine the slump, perceptions by Reinhart and Rogoff (2009, 2011) will play a vital role. Contrary to Minsky their analysis also includes global economic phenomena which will not be deepened. As mentioned, concurring views exist, therefore it has to be considered that the proposed theorists offer one explanation of a complex reality.
Market economies share a key element in the expansion phase of business cycles: the willingness to strike up financial risk surges, when expectations of return on investment are bright. Hyman P. Minsky`s (2008) documented this coherence in his book “stabilizing an unstable economy” and his primary concern looking at business cycles was not the contraction period and slump. Rather he was concerned with the instability caused by the transition from tranquil and sustained growth to a speculative boom (ibid: 193). Despite differences between capitalist economies, Minsky saw similar characteristics between them (Tymoigne (2009): 116).
Investment is the vital element in Minsky’s analysis of business cycles. As he states, it “is the essential determinant of the path of a capitalist economy” (Minsky (2008): 191). His theory of investment is “fundamentally financial” (Fazzari et al. (2001): 99) because “the stability of the economy depends upon the way investment and positions in capital assets are financed” (Minsky (2008): 192). In a capitalist economy investment is often financed by resorting to external funds, i.e. credit or issuing equities. Therefore a decision to invest does not only include considerations of expected cash flows and prices of investment goods, but also financing costs as reflected by the risks faced by lenders and borrowers of external funds (ibid: 206).
The capitalist economy is an investing economy which “depends upon the pursuit of private incomes and wealth for the creation and maintenance of capital assets as well as for current production“(ibid: 78). In this economy capital assets like structures, equipment and inventories are used as productive input to produce other goods and services, while the financial system composed of banks, funds and insurance companies enables firms to handle their investments (Samuelson & Nordhaus (2010): 352p.). Financial assets, as paper or electronic records, are “monetary claims by one party against another party” (ibid.). A balance sheet of a firm typically includes capital and financial assets on the one hand, and liabilities on the other hand which are commitments by the firm to serve and repay its debt (Minsky (2008): 79). While financial assets are claims by someone, liabilities are obligations by someone else.
On the firm level the decision to invest in new capital assets depends on the relation between their demand and supply prices. The demand price of capital assets is derived from the expected profits they are going to yield, i.e. expected cash flows (ibid: 195). All capital assets generate cash flows over two channels (ibid: 202): One channel is money that is gained once they are integrated into production. Another channel is selling or pledging the capital assets whereby the ability to transform them into cash without serious losses, determines their liquidity, which additionally influences their purchase price (ibid). These expected income sources are uncertain and depend on the development of the economy (ibid: 243).
If for the financing of capital assets, external funds are needed, the demand price can change substantially. Borrowing funds can increase the risk of insolvency by the borrower as investing firm. Although this borrower’s risk is not mentioned in any contract and not reflected in objective costs (ibid: 214), it is incorporated in the buying decision (Wray, Tymoigne (2008): 9). The borrower’s risk will increase with the amount of external funds needed. To reduce the risk of insolvency, the borrower therefore will include a margin of safety in his pricing decision. A margin of safety is the “difference between prospective cash receipts and cash commitments” (Kregel (2008): 7) and held as liquid assets (money, demand deposits) so that it is possible to meet near-term obligations which may stem from unforeseen events (Minsky (2008): 243). In other words a margin of safety is like a cushion which enables the repayment of debts even when revenues are below expectations (Wray & Tymoigne (2014): 42). A borrower can increase his margin of safety to reduce risks by lowering the demand price (ibid: 213). The final demand price thus depends on the expected profits and on the borrower’s risks of failure to serve debt. As will be shown, the ability to meet debt obligations varies between different stages of the business cycle.
To produce capital assets, labor and machinery are needed and the costs for these factors of production flow into the output price of capital assets. As long as the output price is related to adequate sales by the firm (Wary & Tymoigne (2008): 7), it can include a mark-up over marginal costs of production (Tymoigne (2009): 139). This mark-up enables a firm to generate profits, which are influenced by the size of the firm’s market share (Papadimitriou & Wray (1999): 7). Profits motivate and reward businesses (Minsky (2008): 191). On a micro level firms use profits to serve their debt (Papadimitriou & Wray (1999): 9), to finance new investment (internal funds) (Minsky (2008): 205) or to accept new financial obligations (ibid: 159). The supply price of capital assets can be seen as output price which is the bid price by its producers (ibid: 210).
But again if the investing firm cannot pay for the investment with its internal funds and thus needs to resort to external financing, the supply price of capital assets also includes financing costs (Minsky (2008): 205). The financing costs contain interest payments and other fees as well as implicit costs as increased supervision by lenders (Papadimitriou & Wray (1999): 9). The risk faced by a lender of funds to a buyer of assets is included in the supply price of the asset (Papadimitriou, Wray (2008): 3). As Minsky states “lender’s risk is expressed in higher stated interest rates, in terms to maturity, and in covenants and codicils” (Minsky (2008): 214). From this follows that the total supply price is higher than “the price administered by supplies […] due to ‘lender’s risk’ that is covered by finance cost of borrowed funds” (Wray & Tymoigne (2008): 9). As assurance against the risk of default a lender of funds will also require a margin of safety. As Kregel (2008) states, this margin could be determined by any factor which enables the lender to recover the borrowed funds even if return expectations out of the investment project are not fulfilled (ibid: 8).
Figure 2: Demand and supply price of capital assets 
illustration not visible in this excerpt
Figure 2 summarizes the discussed issues. The demand price (PD) and supply price (PS) are horizontal lines which after a threshold level decline and rise respectively. Up to a certain point the bid prices by producers and the expected returns on investment are independent of the investment quantity. The investment that can be financed through internal funds is given by I(internal). The demand price will be lowered if external funds are used to finance the investment project. The more investment is financed externally the more borrower’s risk (br) increases and the demand price decreases. The decrease in the demand price can happen before I(internal), if the implicit rate of return on money changes and/or a market saturation for a given capital asset occurs so that cash flows out of the given capital asset sink (Tymoigne (2009): 138p.). Due to limitations in the production capacities, the supply price can increase after a certain output level, which can also happen before I(internal). Independent of these limitations when external financing is needed, the risk faced by lender’s (lr) additionally pushes the supply price upwards.
To sum up “the demand for protection by borrowers lowers the demand price for capital assets and by lenders raises the supply price of investment output” (Minsky (2008): 211). Investment will then be realized until I(int.+ext.) whereby the interval between this point and I(internal) is the investment which is externally financed. This interval also reflects the level of indebtedness (De Antoni (2006): 158). What follows is, whenever the demand price of a capital asset is equal to or exceeds its supply price, investment will be induced (Minsky (2008): 160). If it exceeds the supply price “an implicit capital gain is realized at the moment an investment project is fully assimilated to the stock of capital assets. Such capital gains serve as lure that induces investment activity” (ibid: 238). If the demand price is below the supply price no capital gains and no investment are realized.
The explanations so far are on the microeconomic level but can be expanded to the macroeconomic level. The peculiarity of Minsky’s approach is that he distinguishes two overall price systems in the economy: the price system for current output and the price system for assets (ibid: 160). The price system for current output contains two sets of prices which are the prices of consumption goods and for investment goods (Tymoigne (2009): 140). Government expenditure serves as support system of output prices and profits (Kregel (1992): 87). The supply price of an investment good, excluding financing costs, originates from this price system, since investment goods appertain to current output (Minsky (2008): 200). The financing costs however accrue from the price system for assets. This price system contains the prices of capital asset and the prices of financial assets (liabilities), which both generate cash flows (Tymoigne & Wray (2014): 42). As Minsky writes the capital asset price, “which depends upon the quasi-rents that are expected, enters into the determination of the demand price (and pace) of investment” (Minsky (2008): 238). Moreover the value of capital assets influences the value of liabilities and so the prices of capital assets “have an impact on the viability of the balance sheets of both the firms and its bankers” (Kregel (1992): 87).
In an economy with stock exchange, the price of capital assets is substituted by the market valuation of capital assets and market share of the firm; this market valuation is given by the value of the firm’s stocks and debts minus the financial assets it owns (ibid: 208). Financial assets yield cash flows after contract fulfilment, which influence its price (Minsky (2008): 202).
The determination of the aggregate level of investment is similar to the micro determination (Tymoigne (2008): 142). Although the prices of capital assets and for current output are determined in different markets, they are not independent and are linked since investment also belongs to current output (Minsky (2008): 196). A business cycle results out of the development of these prices. As Minsky writes, whenever “the price level of capital assets is high relative to the price level of current output, conditions are favorable for investment” (ibid: 160), otherwise capital gains are not realized and recession or depression might loom.
In an expansion phase of the business cycle, expectations of rising output prices lead to an increase in capital asset prices (Kregel (1992): 87). Stock market growth reflects this mounting market value of capital assets. Expected and realized cash flows out of investment increase and financing of investment will be facilitated, including the creation of new financial innovations (Minsky (2008): 220). Consequently investment activity surges: on the macroeconomic level capital asset prices are high relative to the cost of investment and on a microeconomic level the demand price of an investment good exceeds its supply price. In this situation firms and banks take on higher risks to finance investment and margins of safety of borrowers and lenders diminish. In a period of transition from economic stability to a booming economy a “slow and imperceptible erosion of margins of safety” (Kregel (2008): 8) can be witnessed. This will have repercussions on the demand/supply prices and asset/output price relations.
As Keynes (2007) writes, to whom Minsky extensively refers, the problem of a booming economy is, that it is typically characterized by overinvestment meaning that investment is being done under conditions which are instable and will not last since they are caused by expectations which will be disappointed (ibid: 321). Economic agents have expectations about the future which are mainly formed by past and recent events (ibid: 147) and are highly uncertain whereby agents know that their expectations can be systematically wrong (Tymoigne (2009): 119p.):
“Thus, the competitive race to anticipate the future is at the source of the productivity of the capitalist system but also at the source of its instability.” (ibid: 117)
According to Keynes these expectations are subject to “the uncontrollable and disobedient psychology of the business world “(Keynes (2007): 317) whereby in the later stages of expansion (boom), economic agents become over- optimistic about the further outlook of the economy (ibid: 158).
To describe the increasing risk levels and thus mounting difficulties to repay debt, Minsky distinguishes between three types of financing investment: Hedge, Speculative and Ponzi. Firms hedge finance their investments if cash flows from operating capital assets or owning financial contracts are anticipated to be sufficient to pay now and in the future for liabilities (interest and principal) (Minsky (2008): 226). Hedge finance is relatively safe since the volume of debt is relatively small (ibid: 230). When cash flows are not fully sufficient to meet payment commitments in a certain period, financing is speculative and rolling over of debt is necessary (ibid). Short term payment liabilities usually cannot be met and debt has to be refinanced (Wolfson (2002): 394). Interest on indebtedness can be paid but new loans are needed to pay for maturing loans (Kindleberger & Aliber (2005): 28). A Ponzi financing unit “cannot even make the interest payments so must ‘capitalize’ them” (Wray (2011): 4). Capitalizing interest payments means borrowing money or selling assets to pay for interest and consequently a situation results in which debts are paid by issuing debts (Minsky (2008): 222).
The speculative and Ponzi financing require that borrowers and lenders have the conviction that financial markets will smoothly operate and selling assets or issuing debts will be possible under conditions where the cost of investment does not exceed the cash flows out of investment ( ibid: 243). Both forms of financing are an indicator of augmented risk taking and gain importance in the course of the expansion. An increasing number of investment projects are debt financed and the proportion of internal funding narrows. The liability structures change, indebtedness grows and liquidity is being reduced. The boom as last stage of the expansion does not explain the emergence but the acceleration of weakening of financial positions “because as it proceeds, the pool of high quality borrowers shrinks and to maintain their market share bankers need to expand their business towards more risky loans” (Tymoigne (2009): 146). During the boom unemployment is very low, nominal wages grow and inflation rises whereby the latter will be included in financial contracts making the economy “more sensitive to the realization of price expectations” (ibid: 145). The resulting situation is one in which the financial system is becoming more and more fragile and the prospective economic performance blurs.
In the boom period of a business cycle over-optimism leads to the belief that crises are something of the past:
“The authorities recognize that something exceptional is happening in the economy and while they are mindful of earlier manias, ‘this time it’s different’, and they have extensive explanations for the difference.” (Kindleberger & Aliber (2005): 27)
“The essence of the this-time-is-different syndrome is simple. It is rooted in the firmly held belief that financial crises are things that happen to other people in other countries at other times; crises do not happen to us […] we have learned from past mistakes.” (Reinhart & Roghoff (2009): 15)
The term mania and the this time is different belief reflect that economic agents increasingly deviate from rational behavior (Kindleberger & Aliber (2005): 29). Following Keynes, in times of a growing importance of the stock exchange, an increasing part of investment belongs to those who do not own or know sufficient about the companies they invest in and thus it is difficult to make sensible valuations of investment (Keynes (2007): 153). Consequently investing agents are often ignorant in terms of what they buy and much keener on predicting changes in the moods of the markets, i.e. they are speculating (ibid: 316). This ignorance leads to waves of over-optimism in times of boom and over-pessimism in times of contraction.
As has been discussed, in the expansion period, more investment is financed through debts. During the “speculative boom” (Kindleberger & Aliber (2005): 31) interest rates will increase either because lenders perceive greater risk or due to a tighter monetary policy following fears of inflation by the central bank (Papadimitriou, Wary (1999): 10). Rising interest rates but also a disappointment of expected cash flows can turn a speculative into a Ponzi position (ibid). The margins of safety are reduced and the risks faced by borrowers and lenders increase. This will lead to higher costs of investment projects, especially of those which need time for completion, and reduces capital gains (Minsky (2008): 241). Things get worse when the “profit-maximizing behavior does not generate sufficient cash to service debt and sustain asset values” (ibid: 190). Firms are much keener on reducing debt in this situation than spending on new investment. Lenders of funds know that they have too many risky loans and will not renew them when they mature (Kindleberger & Aliber (2005): 91).
Those economic agents with very high debts will go bankrupt when asset prices decline too much so that asset values fall below the borrowed funds (ibid: 32). Thus deleveraging as debt deflation takes place where borrowers default on their obligations and repay less to lenders as originally borrowed. Lenders will thereby lose money and borrowers will have a debt relief (Clarfeld (2012)). Investment as a consequence is being reduced or positions even need to be sold. The liquidity preference increases so that economic agents prefer to hold money. Capital asset prices in this process will decrease sharply relative to their output price, reflected by the stock market which crashes and a “spiral of declining investment, declining profits, and declining asset prices” (Minsky (2008): 239) will occur. With the reduction in investment, unemployment will increase (Keynes (2007): 322). This will have repercussions on wages and aggregate demand which will decline. In this period the moods change from over-optimism to over-pessimism, a state of panic might occur “or as the Germans put it, Torschlusspanik […] as investors crowd to get through the door before it slams shut” (ibid).
In this situation of financial distress meeting financial obligations gets more and more difficult, with rising interest rates and declining asset prices. What ensues from a financial distress is a variety of possible crises (ibid: 98). Following Minsky the kind and gravity of a crisis will thereby depend on various factors such as the overall liquidity of the economy, the size of the government sector and the monetary policy applied by the central bank (lender-of-last-resort):
“Thus, the outcome of a contraction is determined by structural characteristics and by policy:” (Minsky (2008): 245)
Government intervention can stabilize aggregate demand, income and employment but also the financial system by promoting profits and issuing government bonds (Arestis & De Antoni (2007): 2). The latter can be easily transformed into money and serve as assurance against bankruptcy (ibid: 11). Through its lender-of-last-resort function the central bank can help to sustain asset prices and can push liquidity to financial institutions whereby these measures reduce the probability of debt deflations (De Antoni (2006): 165).
Despite possible interventions by the government and the central bank, looking at the NBER business cycle chronology (see chapter 3.1) it is evident that even today with experiences from past crises and an elaborate economic research, financial crises can be severe and are a recurring element of capitalism. Moreover as Reinhart and Rogoff (2009) show, although each crisis is to some extend unique, crises can be categorized by different concepts. The authors define three general concepts: Crises defined by events, Crises defined by quantitative thresholds and serial default. Obviously not only the expansion period but also the contraction phase and slump in different business cycles have to some extent similar characteristics. The types of crises subsumed under the concepts can occur simultaneously and are related. In the remaining section of this chapter, the three concepts shall be explained briefly.
Crises defined by events
Among crises defined by events are banking crises as well as external and domestic default. Banking crises occur when banks get under pressure due to large withdrawals from bank deposits and/or because their assets quality deteriorates (Reinhart & Rogoff (2009): 9). Large withdrawals are commonly referred to as bank runs. A bank normally borrows from bank deposits and transfers loans with longer maturities to businesses whereby in a stationary state of the economy, it has sufficient liquidity to “handle any surges in deposit withdrawals” (ibid: 144). Problems arise when depositors run to the bank in panic to withdraw money on a large scale (Gorton (1988): 752). By comparing bank panic dates with the NBER business cycle chronology, Gorton (1988) finds that bank runs arise just after business cycle peaks (ibid: 753). Why people panic is subject to diverging views ranging from “random manifestations of […] ’mass hysteria’ rooted in individual and collective psyches” (ibid) to changes in risk perceptions by economic agents due to the occurrence of events like a looming recession (ibid: 754). For banks this question is irrelevant, they will have to get liquidity and therefore sell their own assets mostly at “fire sale prices” (Reinhart & Rogoff (2009): 144). The phenomenon of a bank run thereby can spread like a wildfire:
“However, if a run occurs, it can bankrupt the entire system, turning a damaging problem into a devastating one.” (ibid: 145).
In recessionary times banks also have difficulties when bankruptcies in the real economy lead to defaults on their bank loans which can further amplify the crisis (ibid). Banks will then reduce their lending and might default on their own liabilities. The latter can often be witnessed in repressed financial systems after domestic default (ibid: 143).
A domestic default involves default on domestic debt which is debt issued under national law and mostly in domestic currency (ibid: 13). Regarding domestic debt the government could use inflation to reduce its debts burden but there are times when this is costlier than repudiation (ibid: 111). An external debt crisis results out of outright default by the domestic government on its loans which were issued under foreign law, mostly in foreign currency and which belong to foreigners (ibid: 10). The government either renegotiates debt contracts to the disadvantage of lenders under “terms less favorable than the original obligation” (ibid: 11). Or it defaults on or repudiates the debt completely. Economic history shows that as a consequence of an external debt crisis, governments are often cut off for many years from international credit markets (ibid: 12p.).
Crises defined by quantitative thresholds
Among crises defined by quantitative thresholds are inflation, currency crashes, currency debasement and bursting of asset price bubbles. Inflation crises have a long history and can last many years (ibid: 4). The German hyperinflation spell after the First World War is a famous example of an inflation crisis which began in 1914 and lasted until 1923. At the height of the crisis, prices rose by more than 50 percent each month, making a theater ticket at some point cost more than one billion mark (Jung (2009): 112). Reinhart and Rogoff (2011) have their own definitions of inflation crises: An inflation crisis begins at a threshold level of 20 percent and a hyperinflation at 500 percent per annum (Rogoff & Reinhart (2011): 1678).
Inflation crises and currency crashes “traveled hand in hand in the overwhelming majority of episodes across time and countries” (Rogoff & Reinhart (2009): 189, italics in original). A currency crash happens when a currency depreciates sharply. A depreciation of 15 percent and more per year of a currency against U.S. dollar can be seen as reasonable indicator of a currency crash (ibd: 7). Currency debasements, after the First World War, were discernible in currency conversions due to hyperinflation (ibid: 6). Germany after 1923 solved its hyperinflation problems by introducing the Rentenmark (Jung (2009): 113). After each inflation crisis or currency debasement it is often difficult to convince economic agents to use the domestic currency after disinflation again (ibid: 191).
Asset price bubbles are a phenomenon which causes great disagreement between economists, with some arguing they do not exist and others convinced that they exist (Krugman (2009)). Assuming the existence of bubbles, these are reflected by an unsustainable overpricing of assets which almost certainly comes to a sudden end (Kindleberger & Aliber (2005): 1). Figure 3 ironically points to the recent bubble phenomenon and its implosion witnessed in the U.S. real estate market prior to the world financial crisis in 2008.
Figure 3: Mr.Housing Bubble 
illustration not visible in this excerpt
To explain why an overpricing might occur, the initially discussed investment behavior of economic agents gives a reasonable answer. A bubble is a phenomenon where agents are solely interested in predicting the moods of the markets: It is not the rate of return of investment that determines the demand for a certain asset class but only the expectation to sell it at a higher price to someone else in the future (ibid: 13). Spotting bubbles is extremely difficult.
“Who knows that it is a bubble? Who knows that the highest point of pressure is not reached to-day, and that to-morrow the waters will not begin to subside?” (Gibons (1858): 94)
Irving Fisher two days prior to the Wall Street crash in 1929, which for many economists was a consequence of overpriced stocks, uttered his conviction that “stock prices have reached what looks like a permanently high plateau” (Fisher (1929), cited in Mansharamani (2011): 34). What can be said with certainty is that the bursting of the bubble has severe consequences for the entire economy: Asset prices decline sharply, banks and other financial institutions accrue huge losses on their balance sheets, lending is massively reduced, output is lowered and employment declines, among others (Collignon (2009): 5).
Serial default describes multiple sovereign defaults on domestic and/or external public debt (Reinhart & Rogoff (2009): 14). The term debt intolerance in this context is of interest. It stands for the fact that emerging economies notice more duress on much lower external debt levels than developed economies, meaning that they are the first to witness a “loss in market confidence, spiraling interest rates on external government debt, and political resistance to repaying foreign creditors” (ibid: 21). In general, if a country serially defaults, then debt intolerance is often high and long lasting (ibid: 29p.).
The subject of this chapter is the clarification of the research question. This subchapter will lead the theoretical discussion to the econometric modelling. First in chapter 2.3.1 the distinction between classical and growth cycle analyses to detect past business cycles will be presented. This is important because the frequency and duration of these cycles vary. In chapter 2.3.2 the main features of business cycles indicators and some leading indicators will be shown. Moreover given previous research a theoretical presumption about the direction and timing of art prices as business cycle indicator will be made.
The econometric analysis in chapter 3 of this thesis will draw on both classical business and growth cycles. In order to understand the differences between both cycles, this chapter aims at explaining them. Classical business cycles have already been discussed in chapter 2.2. Minsky’s financial instability hypothesis and a typology of financial crises by Reinhart and Rogoff have been presented to explain the processes within a business cycle. These explanations focus on simultaneous or deferred, and absolute changes in key macroeconomic variables which are analysed to assess the overall state of the economy. In case of an absolute decline or rise in the performance of the economy, it is common to talk of classical business cycles (Artis et al. (2004): 7).
Each classical business cycle is unique and differs in duration, depth and dispersion as “The Three D’s of Business Cycles” (Kacapyr (1996): 17pp.). The duration of the cycle varies substantially from 1 to 10 or more years and depends to some extent on economic policies applied by the government and the central bank, especially during crises periods. Depth is an indicator for the strength of absolute changes, so that a recession is more than a “mere slowdown in real growth” (Fiedler (1990): 131). Dispersion represents the scope of the cycle meaning “how much of the economy is hit, a broad range of industries throughout the entire economy or only a few industries […] measured by e.g., the percentage of industries experiencing declines or increases in employment” (Jacobs (1998): 6, italics in original).
Classical business cycles do not occur periodically and are very difficult to detect, which makes forecasting them difficult. Lucas (1977) with his famous definition approaches the phenomenon of the business cycle from a different perspective. Although one business cycle differs from another, all business cycles are “all alike […] with respect to the qualitative behavior of co-movements among series” (Lucas (1977): 10). Differencing a single aggregate series results in non-uniform movements around trend but regularities can be observed in the cyclical co-movements among different aggregate time series (ibid: 7 & 9). As a consequence Lucas deduces that business cycles might possibly emerge due to general laws behind market economies rather than as consequence of the characteristics of institutions and politics (ibid: 10).
Growth cycles are basically cyclical fluctuations of time series being deviations from their long-run trends (Stock & Watson (1999): 9). Consequently the definition of growth cycles is data driven so that “the proof of the pudding is in the eating” (Hassler et al. (1992): 11). This evokes the problem of how to define the cyclical component which “means confronting the classical statistical problem of representing a given time series […] as the sum of a trend component, a cyclical component, a seasonal component, and a noise component” (Hassler et al. (1992): 8p.). In the literature different methods can be found to extract the cyclical component or equivalently to remove the trend component out from a given series.
First of all, most time series nowadays are available as seasonally adjusted series, so that only a trend, a cyclical and a noise component remain. It is common among growth cycle practitioners to use elaborate filtering methods to obtain the cyclical movement of a series. A great impact since the 1990s have had filters by Baxter and King (1999),
 However when paintings hang in public museums, they are also public goods (Stein (1977): 1021).
 Baumol (1986) shows that in more than 40 percent of cases of data he analysed, the returns were negative (ibid: 13).
 Goetzmann (1993) finds that even when an art collection represents diverse styles, the value of such an art portfolio is likely to fluctuate dramatically (ibid: 1375).
 Moreover Pesando (1993) claims that the “transaction costs associated with buying and selling prints are likely to exceed those associated with the purchase and sale of traditional financial assets” (ibid: 1080).
 Mei and Moses have generated an index using the method of repeated-sales regression. This index has been frequently updated and is widely applied by market analysts.
 Campbell (2008) also stresses the high transaction costs which can be up to 30 percent of the sales price but even so she thinks that including art in portfolios is reasonable. By using a longer time horizon as for example 25 years, these transaction costs can be reduced (ibid: 74).
 Wealth is thus not the only factor driving demand in art. Given the global scope of the art market, exchange rates are also influencing the art trade (McAndrew (2012): 90).
 (Bonenkampt et al (2001): 3, with modifications by the author)
 (Minsky (2008): 216, simplification by the author)
 Other important determinants of the crisis discussed by Keynes are the durability of capital assets and the growth rate of the economy (Keynes (2007): 318). Time has to elapse until capital assets become scarce through strain or decay so that investment profitability recurs (ibid). Also the reduction of surplus stocks of commodities is essential for the improvement of the economic situation. This reduction has a deflationary effect and it is possible that this process has to be fully completed before recovery begins (ibid: 331p.).
 The interrelations of inflation crises and currency depreciations are complex (see Kahn (1987)). Just to give an example, through currency depreciation import prices can increase which puts upward pressure on domestic prices (Kahn (1987): 32).
 (Soukoulis(2011), with modifications by the author)
 After the crash, Fisher lost his reputation although his contributions nowadays are highly esteemed. Moreover McGrattans and Prescott (2003), by applying modern growth theory, find that Fisher was actually right and that “stock prices in the fall of 1929 were a little low relative to fundamental values” (McGrattans & Prescott (2003): 2). Again this shows how difficult it is to rightly spot bubbles, if one accepts their existence at all.
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