SSE Working Paper Series in Economics, Stockholm School of Economics
Rational Bubbles and Economic Crises: A Quantitative Analysis
() and Tore Ellingsen
Abstract: We extend the Bewley-Aiyagari-Huggett model by
incorporating an incomplete stock market and a persistent income process.
In this quantitative general equilibrium framework, non-fundamental asset
values are both large and desirable for realistic parameter values.
However, if expectations shift from one equilibrium to another, some
markets may crash as others soar. In the presence of nominal assets and
contracts, such movements can be highly detrimental. Our analysis is
consistent with the view that some of the world’s large recessions were
caused by an avoidable failure of monetary and fiscal policy to prevent
deflation in the aftermath of bursting asset price bubbles.
Keywords: Bubbles; Incomplete Markets; Depressions; Fiscal Policy; Monetary Policy; (follow links to similar papers)
JEL-Codes: E31; E32; E41; E63; (follow links to similar papers)
49 pages, February 13, 2015
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