活动内容
Topic
Contagious Bubbles
Speaker
Feng DONG
Associate Professor, Tsinghua University
Abstract
This paper proposes a framework to
study contagious stock bubbles in a multi-sector production economy with
heterogeneous investment technologies. Due to financial frictions, stock
bubbles arise endogenously that help inject additional liquidity. Due to
financial linkages, the existence of bubbles in different sectors may be
interdependent. Theoretically, we characterize the entire set of bubbly equilibria,
and provide the condition under which the burst of bubbles in one sector spikes
bubbles in other sectors. Quantitatively, we show that due to an unexpected
burst of bubbles, it can generate severe a recession only when the burst
happens in a vital sector and transmits to the rest of the economy.