IMF Economic Review

, Volume 59, Issue 1, pp 6–40 | Cite as

Theoretical Notes on Bubbles and the Current Crisis

  • Alberto Martin
  • Jaume Ventura
Article
First Online:

Abstract

This paper explores 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. The paper embeds this view in a standard model of the financial accelerator and explores its empirical and policy implications. In particular, it shows 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 countries. The paper also uses the model to explore the role of fiscal policy.

JEL Classifications

E32 E44 G01 O40 
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Copyright information

© International Monetary Fund 2011

Authors and Affiliations

  • Alberto Martin
  • Jaume Ventura

There are no affiliations available

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