Theoretical Notes on Bubbles and the Current Crisis
نویسندگان
چکیده
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 nancial markets. We embed this view in a standard model of the nancial 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 nancial and real economic activity and; (iii) a fast and strong transmission of shocks across countries. We also use the model to explore the role of scal policy. JEL classi cation: E32, E44, G01, O40 Keywords: bubbles, dynamic ine¢ ciency, nancial accelerator, credit constraints, nancial crisis, pyra-
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