American Economic Review: Vol. 102 No. 3 (May 2012)


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Understanding Bubbly Episodes

Article Citation

Carvalho, Vasco M., Alberto Martin, and Jaume Ventura. 2012. "Understanding Bubbly Episodes." American Economic Review, 102(3): 95-100.

DOI: 10.1257/aer.102.3.95


Over the last two decades US aggregate wealth has fluctuated substantially. Against the backdrop of the Great Recession, the effects of these boom-and-bust cycles have come to dominate academic and policy discussions. How can we explain these fluctuations in wealth? Why are these fluctuations associated with changes in consumption, investment and output? In this note, we argue that answers to these questions entail the addition of two ingredients to existent macroeconomic models: rational bubbles and financial frictions. We explain why each of these building blocks is crucial to understand recent events and how they can be seamlessly integrated in standard models.

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Carvalho, Vasco M. (CREI, Barcelona)
Martin, Alberto (CREI, Barcelona)
Ventura, Jaume (CREI, Barcelona)

JEL Classifications

E21: Macroeconomics: Consumption; Saving; Wealth
E22: Capital; Investment; Capacity
E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
N12: Economic History: Macroeconomics; Growth and Fluctuations: U.S.; Canada: 1913-

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