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Growth Cycles and Market Crashes

  • Boldrin, Michele
  • Levine, David K.

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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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 96 (2001)
Issue (Month): 1-2 (January)
Pages: 13-39

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Handle: RePEc:eee:jetheo:v:96:y:2001:i:1-2:p:13-39
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Zeira, Joseph, 1993. "Informational Overshooting, Booms and Crashes," CEPR Discussion Papers 823, C.E.P.R. Discussion Papers.
  2. Boyan Jovanovic & Rafael Rob, 1990. "Long Waves and Short Waves: Growth Through Intensive and Extensive Search," Levine's Working Paper Archive 2082, David K. Levine.
  3. Jeremy Greenwood & Boyan Jovanovic, 1999. "The IT Revolution and the Stock Market," NBER Working Papers 6931, National Bureau of Economic Research, Inc.
  4. 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.
  5. Lee, In Ho, 1998. "Market Crashes and Informational Avalanches," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 741-59, October.
  6. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  7. 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.
  8. 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.
  9. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  10. 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.
  11. repec:cup:macdyn:v:1:y:1997:i:2:p:312-32 is not listed on IDEAS
  12. Paul David, 2010. "The Dynamo and the Computer: An Historical Perspective on the Productivity Paradox," Levine's Working Paper Archive 115, David K. Levine.
  13. 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.
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