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Understanding Bubbly Episodes

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  • Carvalho, Vasco M
  • Martin, Alberto
  • Ventura, Jaume

Abstract

Over the last two decades U.S. 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 Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8924.

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Date of creation: Apr 2012
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Handle: RePEc:cpr:ceprdp:8924

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Related research

Keywords: bubbles; bubbly episodes; dynamic inefficiency; economic growth; financial frictions;

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  1. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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Cited by:
  1. Karl Farmer, 2013. "Financial Integration and EMU's External Imbalances in a Two-Country OLG Model," Graz Economics Papers 2013-07, University of Graz, Department of Economics.

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