Theoretical Notes on Bubbles and the Current Crisis
Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)
Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI)
IMF Economic Review, Vol. 59, No. 1, pp. 6-40, 2011
This paper explores 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. The paper embeds this view in a standard model of the financial accelerator and explores its empirical and policy implications. In particular, it shows 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 countries. The paper also uses the model to explore the role of fiscal policy.
Number of Pages in PDF File: 35Accepted Paper Series
Date posted: April 4, 2011
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