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A Quantitative Model of Bubble-Driven Business Cycles

Benjamin Larin
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Benjamin Larin: Leipzig University

No 662, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: The 2007-2008 financial crisis highlighted that a turmoil in the financial sector including bursting asset price bubbles can cause pronounced and persistent fluctuations in real economic activity. This motivates the consideration of evolving and bursting asset price bubbles as another source of fluctuations in a business cycle model. In this paper rational asset price bubbles are therefore incorporated into a life-cycle RBC model as first developed by Rı́os-Rull (1996). The calibration of the model to the post-war US economy and the numerical solution show that the model is able to generate plausible bubble-driven business cycles – economic fluctuations caused by evolving and bursting asset price bubbles.

New Economics Papers: this item is included in nep-bec, nep-dge and nep-mac
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:662

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