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Bubble economics

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  • Hirano, Tomohiro
  • Toda, Alexis Akira

Abstract

This article provides a self-contained overview of the theory of rational asset price bubbles. We cover topics from basic definitions, properties, and classical results to frontier research, with an emphasis on bubbles attached to real assets such as stocks, housing, and land. The main message is that bubbles attached to real assets are fundamentally nonstationary phenomena related to unbalanced growth. We present a bare-bones model and draw three new insights: (i) the emergence of asset price bubbles is a necessity, instead of a possibility; (ii) asset pricing implications are markedly different between balanced growth of stationary nature and unbalanced growth of nonstationary nature; and (iii) asset price bubbles occur within larger historical trends involving shifts in industrial structure driven by technological innovation, including the transition from the Malthusian economy to the modern economy.

Suggested Citation

  • Hirano, Tomohiro & Toda, Alexis Akira, 2024. "Bubble economics," LSE Research Online Documents on Economics 122042, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:122042
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    More about this item

    Keywords

    bubbles attached to real assets; necessity versus possibility; nonstationarity; technological progress; unbalanced growth;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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