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New Perspectives on Asset Price Bubbles$
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Douglas D. Evanoff, George G. Kaufman, and A. G. Malliaris

Print publication date: 2012

Print ISBN-13: 9780199844333

Published to Oxford Scholarship Online: April 2015

DOI: 10.1093/acprof:osobl/9780199844333.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 27 October 2021

Rethinking Theoretical Models of Bubbles

Rethinking Theoretical Models of Bubbles

Reflections Inspired by the Financial Crisis and Allen and Gorton’s Paper “Churning Bubbles”1

(p.41) Chapter 3 Rethinking Theoretical Models of Bubbles
New Perspectives on Asset Price Bubbles

Gadi Barlevy

Oxford University Press

This chapter comments on the paper, “Churning Bubbles,” by Franklin Allen and Gary Gorton. In their paper, Allen and Gorton examine whether stock prices are determined by fundamentals or whether “bubbles” can exist. The chapter examines the state of theoretical models of asset price bubbles and considers the lessons learned from the financial crisis of 2007–2009. It also looks at the gap between the theoretical work on asset bubbles and the apparent change in views coming out of the financial crisis about the appropriate policy response. It suggests that theoretical models of bubbles have failed to adequately address welfare considerations and thus are unable to offer convincing analytical guidance to central banks as to whether an economy is better off with or without a bubble.

Keywords:   asset price bubbles, Franklin Allen, Gary Gorton, stock prices, theoretical models, financial crisis, welfare, central banks, economy

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