Monetary Policy and Rational Asset Price Bubbles.
The persistent failure of present-value models to explain asset price levels led academic re-search to introduce the concept of bubbles as a tool to model price deviations from present-value relations. The early literature was dominated by models in which all agents were as-sumed to be rational and yet a bubble could exist.
Bubbles can also be ruled out if there is a maximum possible price that the asset can have. Consider, for example, the question of whether there can be a bubble on the price of diamonds. Suppose that there is a fixed supply of natural diamonds in existence, but suppose that new artificial diamonds can be made at some price, that is diamonds can be made at a cost 4 times higher than the.
The important result of Santos and Woodford (1997) says that price bubbles cannot exist in equilibrium in the standard dynamic asset pricing model with rational agents facing borrowing constraints as long as assets are in strictly positive supply and the present value of total future resources is finite.
Why do asset price bubbles continue to appear in various markets? This paper provides an overview of recent literature on bubbles, with significant attention given to behavioral models and rational models with frictions. Unlike the standard rational models, the new literature is able to model the common characteristics of historical bubble episodes and offer insights for how bubbles are.
Downloadable! I examine the impact of alternative monetary policy rules on a rational asset price bubble, through the lens of an overlapping generations model with nominal rigidities. A systematic increase in interest rates in response to a growing bubble is shown to enhance the fluctuations in the latter, through its positive effect on bubble growth.
It creates bubbles of assets that need to burst one day. One reason for saving the borrowers from risks created by the investors is collateralization of the debts. The best and a live example would be Iphone the company is in the USA and factories and manufactures the Iphone is in China and assemble in USA these are all the best example of interdependence Costs Of Globalisation.
The financial crisis of 2008 all started when Christopher Cox, the chairman of the Securities and Exchange Commission, passed an exemption on the regulations for the big five investment banks. The meeting on April 28, 2004 was “an urgent plea by the big investment banks.”.