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Theoretical Notes on Bubbles and the Current Crisis

  • Martin, Alberto
  • Ventura, Jaume

We explore a view of the crisis as a shock to investor sentiment that led to the collapse of a bubble or pyramid scheme in financial markets. We embed this view in a standard model of the financial accelerator and explore its empirical and policy implications. In particular, we show how the model can account for: (i) a gradual and protracted expansionary phase followed by a sudden and sharp recession; (ii) the connection (or lack of connection!) between financial and real economic activity and; (iii) a fast and strong transmission of shocks across sectors and countries. We also use the model to explore the role of fiscal policy.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8038.

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Date of creation: Oct 2010
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Handle: RePEc:cpr:ceprdp:8038
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  1. Kraay, Aart & Ventura, Jaume, 2005. "The dot-com bubble, the Bush deficits, and the U.S. current account," Policy Research Working Paper Series 3672, The World Bank.
  2. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
  3. Caballero, Ricardo & Farhi, Emmanuel & Gourinchas, Pierre-Olivier, 2008. "Financial Crash, Commodity Prices and Global Imbalances," CEPR Discussion Papers 7064, C.E.P.R. Discussion Papers.
  4. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 3-19, February.
  5. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
  6. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
  7. Jesús Fernández-Villaverde & Lee Ohanian, 2010. "The Spanish Crisis from a Global Perspective," Working Papers 2010-03, FEDEA.
  8. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  9. Saint-Paul, G., 1991. "Fiscal Policy In An Endogenous Growth Model," DELTA Working Papers 91-04, DELTA (Ecole normale supérieure).
  10. Martin, Alberto & Ventura, Jaume, 2010. "Economic Growth with Bubbles," CEPR Discussion Papers 7770, C.E.P.R. Discussion Papers.
  11. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
  12. Ventura, Jaume, 2002. "Bubbles and Capital Flows," CEPR Discussion Papers 3657, C.E.P.R. Discussion Papers.
  13. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  14. Azariadis Costas & Smith Bruce D., 1993. "Adverse Selection in the Overlapping Generations Model: The Case of Pure Exchange," Journal of Economic Theory, Elsevier, vol. 60(2), pages 277-305, August.
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