Theoretical Notes on Bubbles and the Current Crisis

We dedicate this research to the memory of Paul Samuelson, the best economist of the twentieth century, and the first one to understand that pyramid schemes are possible and might raise welfare even if we are all rational and well informed. We thank Fernando Broner and Francesco Caselli for comments on an earlier draft, and Stavros Panageas for a very helpful discussion. We also thank Robert Zymek for excellent research assistance. We acknowledge financial support from the European Research Council, the Lamfalussy Program sponsored by the European Central Bank, the Spanish Ministry of Science and Innovation, the Generalitat de Catalunya, and the Barcelona GSE Research Network. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.