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Growth Cycles and Market Crashes

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  • Boldrin, Michele
  • Levine, David K.

Abstract

Market booms are often followed by dramatic falls. To explain this requires an asymmetry in the underlying shocks. A straightforward model of technological progress generates asymmetries that are also the source of growth cycles. Assuming a representative consumer, we show that the stock market generally rises, punctuated by occasional dramatic falls. With high risk aversion, bad news causes dramatic increases in prices. Bad news does not correspond to a contraction of existing production possibilities, but to a slowdown in their rate of expansion. This economy provides a model of endogenous growth cycles in which recoveries and recessions are dictated by the adoption of innovations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 96 (2001)
Issue (Month): 1-2 (January)
Pages: 13-39

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Handle: RePEc:eee:jetheo:v:96:y:2001:i:1-2:p:13-39

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Web page: http://www.elsevier.com/locate/inca/622869

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References

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  1. Joseph Zeira, 2000. "Informational overshooting, booms and crashes," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  2. GalĂ­, Jordi, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," CEPR Discussion Papers 1499, C.E.P.R. Discussion Papers.
  3. Boyan Jovanovic & Rafael Rob, 1990. "Long Waves and Short Waves: Growth Through Intensive and Extensive Search," Levine's Working Paper Archive 2082, David K. Levine.
  4. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  5. repec:cup:macdyn:v:1:y:1997:i:2:p:312-32 is not listed on IDEAS
  6. Boyan Jovanovic & Jeremy Greenwood, 1999. "The Information-Technology Revolution and the Stock Market," American Economic Review, American Economic Association, vol. 89(2), pages 116-122, May.
  7. Michele Boldrin & Lawrence J. Christiano & Jonas D.M. Fisher, 1997. "Habit persistence and asset returns in an exchange economy," Working Paper Series, Macroeconomic Issues WP-97-04, Federal Reserve Bank of Chicago.
  8. Jeremy Greenwood & Boyan Jovanovic, 1999. "The IT Revolution and the Stock Market," NBER Working Papers 6931, National Bureau of Economic Research, Inc.
  9. Lee, In Ho, 1998. "Market Crashes and Informational Avalanches," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 741-59, October.
  10. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  11. Paul David, 2010. "The Dynamo and the Computer: An Historical Perspective on the Productivity Paradox," Levine's Working Paper Archive 115, David K. Levine.
  12. Andreas Hornstein & Per Krusell, 1996. "Can Technology Improvements Cause Productivity Slowdowns?," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 209-276 National Bureau of Economic Research, Inc.
  13. David, Paul A, 1990. "The Dynamo and the Computer: An Historical Perspective on the Modern Productivity Paradox," American Economic Review, American Economic Association, vol. 80(2), pages 355-61, May.
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