NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Theoretical Notes on Bubbles and the Current Crisis

Alberto Martin, Jaume Ventura

NBER Working Paper No. 16399
Issued in September 2010
NBER Program(s):   EFG

We explore 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. We embed this view in a standard model of the financial accelerator and explore its empirical and policy implications. In particular, we show 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 sectors and countries. We also use the model to explore the role of fiscal policy

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Document Object Identifier (DOI): 10.3386/w16399

Published: Alberto Martin & Jaume Ventura, 2011. "Theoretical Notes on Bubbles and the Current Crisis," IMF Economic Review, Palgrave Macmillan, vol. 59(1), pages 6-40, April.

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