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Theoretical Notes on Bubbles and the Current Crisis

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  • Alberto Martin
  • Jaume Ventura

Abstract

This paper explores a view of the crisis as a shock to investor sentiment that led to the collapse of a bubble or pyramid scheme in financial markets. The paper embeds this view in a standard model of the financial accelerator and explores its empirical and policy implications. In particular, it shows how the model can account for: (i) a gradual and protracted expansionary phase followed by a sudden and sharp recession; (ii) the connection (or lack of connection!) between financial and real economic activity; and (iii) a fast and strong transmission of shocks across countries. The paper also uses the model to explore the role of fiscal policy.

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal IMF Economic Review.

Volume (Year): 59 (2011)
Issue (Month): 1 (April)
Pages: 6-40

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Handle: RePEc:pal:imfecr:v:59:y:2011:i:1:p:6-40

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References

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  1. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 3-19, February.
  2. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  3. Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2008. "Financial Crash, Commodity Prices and Global Imbalances," CEPR Discussion Papers 7064, C.E.P.R. Discussion Papers.
  4. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
  5. Jaume Ventura & Aart Kraay, 2005. "The dot-com bubble, the Bush deficits and the US current account," Economics Working Papers 847, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2005.
  6. Alberto Martin & Jaume Ventura, 2010. "Economic Growth with Bubbles," NBER Working Papers 15870, National Bureau of Economic Research, Inc.
  7. Ventura, Jaume, 2002. "Bubbles and Capital Flows," CEPR Discussion Papers 3657, C.E.P.R. Discussion Papers.
  8. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  9. Jesús Fernández-Villaverde & Lee Ohanian, 2010. "The Spanish Crisis from a Global Perspective," Working Papers 2010-03, FEDEA.
  10. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  11. Azariadis Costas & Smith Bruce D., 1993. "Adverse Selection in the Overlapping Generations Model: The Case of Pure Exchange," Journal of Economic Theory, Elsevier, vol. 60(2), pages 277-305, August.
  12. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
  13. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
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