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Growth Cycles and Market Crashes

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  • Michele Boldrin
  • David K. Levine

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

Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 2028.

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Date of creation: 05 Sep 1999
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Handle: RePEc:cla:levarc:2028

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Web page: http://www.dklevine.com/

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References

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  1. Jovanovic, Boyan & Rob, Rafael, 1990. "Long Waves and Short Waves: Growth through Intensive and Extensive Search," Econometrica, Econometric Society, vol. 58(6), pages 1391-1409, November.
  2. Paul David, 2010. "The Dynamo and the Computer: An Historical Perspective on the Productivity Paradox," Levine's Working Paper Archive 115, David K. Levine.
  3. 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.
  4. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  5. repec:cup:macdyn:v:1:y:1997:i:2:p:312-32 is not listed on IDEAS
  6. Zeira, Joseph, 1999. "Informational overshooting, booms, and crashes," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 237-257, February.
  7. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
  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. 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.
  11. Boldrin, Michele & Christiano, Lawrence J. & Fisher, Jonas D.M., 1997. "Habit Persistence And Asset Returns In An Exchange Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 312-332, June.
  12. 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.
  13. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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