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Theoretical notes on bubbles and the current crisis
Martin, Alberto; Ventura, Jaume
Universitat Pompeu Fabra. Departament d'Economia i Empresa
We explore a view of the crisis as a shock to investor sentiment that led to the collapse of abubble or pyramid scheme in financial markets. We embed this view in a standard model of thefinancial accelerator and explore its empirical and policy implications. In particular, we show howthe model can account for: (i) a gradual and protracted expansionary phase followed by a suddenand sharp recession; (ii) the connection (or lack of connection!) between financial and real economicactivity and; (iii) a fast and strong transmission of shocks across countries. We also use the modelto explore the role of fiscal policy.
Macroeconomics and International Economics
dynamic inefficiency
financial accelerator
credit constraints
financial crisis
pyramid schemes.
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