Working Paper: CEPR ID: DP12641
Authors: Alberto Martin; Jaume Ventura
Abstract: This paper provides a guide to macroeconomic applications of the theory of rational bubbles. It shows that rational bubbles can be easily incorporated into standard macroeconomic models, and illustrates how they can be used to account for important macroeconomic phenomena. It also discusses the welfare implications of rational bubbles and the role of policy in managing them. Finally, it provides a detailed review of the literature.
Keywords: bubbles; credit; business cycles; economic growth; financial frictions; pyramid schemes
JEL Codes: E32; E44; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rational bubbles (E32) | fluctuations in capital flows (F32) |
| rational bubbles (E32) | fluctuations in investment (E22) |
| rational bubbles (E32) | fluctuations in output (E32) |
| market psychology (M31) | rational bubbles (E32) |
| new bubbles (E32) | capital accumulation (E22) |
| new bubbles (E32) | growth (O40) |
| old bubbles (E32) | crowding out of investment (E22) |
| collapse of bubbles (E32) | decreases in investment (E22) |
| collapse of bubbles (E32) | decreases in consumption (E21) |