Understanding Bubbly Episodes

13 Pages Posted: 4 Apr 2012

See all articles by Vasco M. Carvalho

Vasco M. Carvalho

Universitat Pompeu Fabra/CREI; Centre for Economic Policy Research (CEPR); University of Cambridge

Alberto Martin

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Centre for Economic Policy Research (CEPR)

Jaume Ventura

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI)

Date Written: April 2012

Abstract

Over the last two decades U.S. aggregate wealth has fluctuated substantially. Against the backdrop of the Great Recession, the effects of these boom-and-bust cycles have come to dominate academic and policy discussions. How can we explain these fluctuations in wealth? Why are these fluctuations associated with changes in consumption, investment and output? In this note, we argue that answers to these questions entail the addition of two ingredients to existent macroeconomic models: rational bubbles and financial frictions. We explain why each of these building blocks is crucial to understand recent events and how they can be seamlessly integrated in standard models

Keywords: bubbles, bubbly episodes, dynamic inefficiency, economic growth, financial frictions

JEL Classification: E32, E44, O40

Suggested Citation

Carvalho, Vasco M. and Martin, Alberto and Ventura, Jaume, Understanding Bubbly Episodes (April 2012). CEPR Discussion Paper No. DP8924, Available at SSRN: https://ssrn.com/abstract=2034142

Vasco M. Carvalho

Universitat Pompeu Fabra/CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

HOME PAGE: http://www.crei.cat/people/carvalho/welcome.html

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Alberto Martin

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jaume Ventura

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

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