Understanding Bubbly Episodes
AbstractOver the last two decades US aggregate wealth has fluctuated substantially. Against the backdrop of the Great Recession, the effects of these boom-and-bust cycles have come to dominate academic and policy discussions. How can we explain these fluctuations in wealth? Why are these fluctuations associated with changes in consumption, investment and output? In this note, we argue that answers to these questions entail the addition of two ingredients to existent macroeconomic models: rational bubbles and financial frictions. We explain why each of these building blocks is crucial to understand recent events and how they can be seamlessly integrated in standard models.
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Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 605.
Date of creation: Feb 2012
Date of revision:
bubbles; dynamic inefficiency; economic growth; financial frictions; pyramid schemes;
Other versions of this item:
- Carvalho, Vasco M & Martin, Alberto & Ventura, Jaume, 2012. "Understanding Bubbly Episodes," CEPR Discussion Papers 8924, C.E.P.R. Discussion Papers.
- Vasco Carvalho & Alberto Martin & Jaume Ventura, 2012. "Understanding bubbly episodes," Economics Working Papers 1301, Department of Economics and Business, Universitat Pompeu Fabra.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-05-15 (All new papers)
- NEP-FDG-2012-05-15 (Financial Development & Growth)
- NEP-MAC-2012-05-15 (Macroeconomics)
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