Another Look at the Boom and Bust of Financial Bubbles

Andrea Beccarini ()
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Andrea Beccarini: University of Munster, Department of Economics

Annals of Economics and Finance, 2015, vol. 16, issue 2, 417-423

Abstract: A rational bubble is explained through the covariance between the marginal rate of substitution and the future price. Surprisingly, in the present liter- ature, this quantity has always been set equal to zero either because of a first-order Taylor approximation, or because of a risk-neutrality assumption. One first shows that the intrinsic bubble of Froot and Obstfeld (1991) is a re-parameterization of the quantity in question. One then shows how this quantity depends on economic shocks after introducing a Taylor rule-based monetary policy. Some empirical evidence is also presented.

Keywords: Bubbles; Present-value model; Monetary rule (search for similar items in EconPapers)
JEL-codes: E44 G12 (search for similar items in EconPapers)
Date: 2015
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