Sentences to ponder

From Arnold Kling:

So, my advice to Paul and Brad is this: don't start with a model that
focuses on investor beliefs about real economic variables. Instead,
start with a model in which financial firms use signaling to expand,
and the credibility of those signals increases over time as long as
nothing adverse happens. It should be easy to develop a model in which
signaling devices gain credibility slowly but lose credibility
suddenly. That will (a) produce the asymmetry between euphorias and
crashes and (b) tell a story that puts the fragility of the financial
sector in the middle, where it belongs.


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