Asset Bubbles and Macroeconomic Policy

An insightful and in-depth review of asset bubbles—what they are, when and why they arise, and how macroeconomic policy should respond to them.

The existing models of asset bubbles—assets whose price exceeds the present discounted value of the dividends these assets are expected to pay out—have been used to explain various episodes of asset boom-and-busts, ranging from those of the eighteenth century to the present day, including the dot-com and housing booms of the last 25 years.

In Asset Bubbles and Macroeconomic Policy, Gadi Barlevy begins by describing historical examples of asset boom-and-busts that prompted economists to be interested in modeling bubbles and then goes on to discuss impossibility results, or situations in which asset bubbles cannot occur. The book then proceeds to discuss various scenarios in which these impossibility results do not apply (and bubbles are possible). These scenarios include bubbles associated with dynamic inefficiency, credit market frictions, private information, subjective beliefs, and risk-shifting. For each of these different explanations, the book discusses specific models to illustrate how a bubble can occur, the empirical predictions of those models, and implications for policy.Series Foreword
Preface
1 Introduction: From Asset Booms to Bubbles
2 Non-Existence Results
3 Dynamic Inefficiency Bubbles
4 Credit Constraints and Bubbles
5 Finite Duration Bubbles without Common Knowledge
6 Subjective Beliefs, Disagreements, and Bubbles
7 Risk-Shifting Bubbles
8 Conclusion
References
IndexENDORSEMENTS

"A rigorous yet accessible monograph on asset bubbles—offering a crisp review of the literature, a unifying prism on disparate theories, and sharp insight. Essential reading for graduate students and policymakers alike."
—George-Marios Angeletos, Stanley J. Gradowski Jr. Professor of Behavioral Macroeconomics, Northwestern University

“This book provides a highly readable and thorough treatment of the vast literature on asset price bubbles and their macroeconomic implications. It would add great value to any macro or finance second-year PhD course.”
—Narayana R. Kocherlakota, Louise and Henry Epstein Professor of Business Administration, Simon Business School, University of Rochester

“From the tulip mania to crypto, bubbles are a recurrent and fascinating phenomenon. They raise fundamental issues about the environment in which they appear, the nature of asset markets, the formation of expectations. The book by Gadi Barlevy does a superb job of presenting complex issues in a transparent way.”
—Olivier Blanchard, Robert Solow Professor of Economics Emeritus, MIT

“Why do asset bubbles form, and how should we respond? Gadi Barlevy blends historical insight with economic theory in a crisp, accessible guide to understanding—and confronting—the macroeconomic consequences of bubbles.”
—Alberto Martin, Senior Researcher, Centre de Recerca en Economia Internacional

“Gadi Barlevy’s superb book summarizes the academic literature on bubbles and policy in a comprehensive and understandable way. As the first work to do this, it is a must-read for scholars, practitioners, and policymakers.”
—Franklin Allen, Professor of Finance and Economics, Imperial College London

“A masterfully clear and comprehensive treatment of bubble models—from rational to belief-driven—with rich macroeconomic insights. A definitive reference for researchers and an essential resource for PhD teaching.”
—Alp Simsek, Professor of Finance, Yale School of ManagementGadi Barlevy is a Senior Economist and Economic Advisor at the Federal Reserve Bank of Chicago. He has served as Coeditor at Theoretical Economics and the Review of Economic Dynamics and as an Associate Editor at the Journal of Economic Theory and the European Economic Review.