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Theoretical Notes on Bubbles and the Current Crisis

Alberto Martin and Jaume Ventura

IMF Economic Review, 2011, vol. 59, issue 1, 6-40

Abstract: 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.

Date: 2011
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Working Paper: Theoretical notes on bubbles and the current crisis (2011) Downloads
Working Paper: Theoretical notes on bubbles and the current crisis (2011) Downloads
Working Paper: Theoretical Notes on Bubbles and the Current Crisis (2010) Downloads
Working Paper: Theoretical Notes on Bubbles and the Current Crisis (2010) Downloads
Working Paper: Theoretical Notes on Bubbles and the Current Crisis (2010) Downloads
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