Universität Mannheim / VWL / Priority Programme 1578 / Navigation / Projects / The Role of the Financial Sector in the Transmission and Prevention of Asset Price Bubbles

The Role of the Financial Sector in the Transmission and Prevention of Asset Price Bubbles

Coordinator: Prof. Dr. Zeno Enders, Prof. Dr. Hendrik Hakenes

Participants: Jörg Rieger, Ph.D. 

Boom and bust cycles of asset prices occur repeatedly across different economies and time periods. Often, the burst of such a ‘bubble’ is accompanied with a strongly declining economic activity. The project aims at developing a deeper understanding of the mechanisms leading to the emergence of asset price bubbles and how their collapses are transmitted to the real sector of the economy. In this analysis, a special focus will be placed on the role of the financial sector for the emergence and transmission of bubbles.
In particular, we will develop a general framework for the analysis of expectation-driven asset price bubbles in a dynamic stochastic general equilibrium model. Within this model, we intend to explore the macroeconomic consequences of the build-up and subsequent burst of asset price bubbles. Besides investigating the effects on the domestic economy, we also going to explore the international dimension by investigating the contributions of foreign economies to fueling a bubble, and to which extent they are affected after the bubble has collapsed. Finally, a detailed investigation of the trade-offs faced by economic policy will generate concrete suggestions for monetary (and potentially fiscal) policy. Ultimately, these policy implications aim at increasing welfare by reducing volatilities of real variables and avoiding the repeated occurrence of recessions that follow the bursts of bubbles.

Working Papers:

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