Working Paper: NBER ID: w16399
Authors: Alberto Martin; Jaume Ventura
Abstract: 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
Keywords: bubbles; financial crisis; investor sentiment; fiscal policy
JEL Codes: E32; E44; G01; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor sentiment (G41) | Firm prices (L11) |
| Firm prices (L11) | Net worth for firms (G32) |
| Net worth for firms (G32) | Borrowing capacity (G51) |
| Borrowing capacity (G51) | Credit expansion (E51) |
| Credit expansion (E51) | Economic boom (N12) |
| Investor sentiment (G41) | Firm prices (bubbles) (L11) |
| Investor sentiment (pessimistic) (G41) | Firm prices (bubbles burst) (D41) |
| Firm prices (bubbles burst) (D41) | Decreased net worth (G32) |
| Decreased net worth (G32) | Tighter credit constraints (E51) |
| Tighter credit constraints (E51) | Recession (E32) |