Speculative Bubbles and Financial Crises
Are asset prices unduly volatile and often detached from their fundamentals? Does the bursting of financial bubbles depress the real economy? This paper addresses these issues by constructing a DSGE model with speculative bubbles. We characterize conditions under which storable goods, regardless of their intrinsic values, can carry bubbles, and agents are willing to invest in such bubbles despite their positive probability of bursting. The results show that systemic risk, commonly perceived changes in the bubble's probability of bursting, can generate boom-bust cycles with hump-shaped output dynamics and produce asset price movements many times more volatile than the economy's fundamentals. (JEL E13, E23, E32, E44, G01, G12).
Volume (Year): 4 (2012)
Issue (Month): 3 (July)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kocherlakota, Narayana R., 1992.
"Bubbles and constraints on debt accumulation,"
Journal of Economic Theory,
Elsevier, vol. 57(1), pages 245-256.
- Patrick-Antoine Pintus & Yi Weng, 2009. "Leveraged financing, over investment, and boom-bust cycles," Working Papers halshs-00439245, HAL.
- Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
- Emmanuel Farhi & Jean Tirole, 2008.
"Competing Liquidities: Corporate Securities, Real Bonds and Bubbles,"
NBER Working Papers
13955, National Bureau of Economic Research, Inc.
- Farhi, Emmanuel & Tirole, Jean, 2008. "Competing Liquidities: Corporate Securities Real Bonds and Bubbles," IDEI Working Papers 506, Institut d'Économie Industrielle (IDEI), Toulouse.
- Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
- John Kareken & Neil Wallace, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 96(2), pages 207-222.
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