American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Speculative Bubbles and Financial Crises
American Economic Journal: Macroeconomics
vol. 4,
no. 3, July 2012
(pp. 184–221)
Abstract
Are asset prices unduly volatile and often detached from their fundamentals? Does the bursting of financial bubbles depress the real economy? This paper addresses these issues by constructing a DSGE model with speculative bubbles. We characterize conditions under which storable goods, regardless of their intrinsic values, can carry bubbles, and agents are willing to invest in such bubbles despite their positive probability of bursting. The results show that systemic risk, commonly perceived changes in the bubble's probability of bursting, can generate boom-bust cycles with hump-shaped output dynamics and produce asset price movements many times more volatile than the economy's fundamentals. (JEL E13, E23, E32, E44, G01, G12).Citation
Wang, Pengfei, and Yi Wen. 2012. "Speculative Bubbles and Financial Crises." American Economic Journal: Macroeconomics, 4 (3): 184–221. DOI: 10.1257/mac.4.3.184Additional Materials
JEL Classification
- E13 General Aggregative Models: Neoclassical
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- G01 Financial Crises
- G12 Asset Pricing; Trading volume; Bond Interest Rates
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