Search Results
Journal Article
Bubbles and Fools
This article reviews the literature on greater-fool theories of bubbles, which argue that bubbles can arise if traders are willing to buy assets they know to be overvalued because they hope to later sell them at a profit to others. The author discusses two approaches that attempt to model this phenomenon and what these approaches imply for economic policy.
Discussion Paper
Is There a Bitcoin–Macro Disconnect?
Cryptocurrencies’ market capitalization has grown rapidly in recent years. This blog post analyzes the role of macro factors as possible drivers of cryptocurrency prices. We take a high-frequency perspective, and we focus on Bitcoin since its market capitalization dwarfs that of all other cryptocurrencies combined. The key finding is that, unlike other asset classes, Bitcoin has not responded significantly to U.S. macro and monetary policy news. This disconnect is puzzling, as unexpected changes in discount rates should, in principle, affect the price of Bitcoin.
Working Paper
Bubbly Recessions
We develop a tractable rational bubbles model with financial frictions, downward nominal wage rigidity, and the zero lower bound. The interaction of financial frictions and nominal rigidities leads to a "bubbly pecuniary externality," where competitive speculation in risky bubbly assets can result in excessive investment booms that precede inefficient busts. The collapse of a large bubble can push the economy into a "secular stagnation" equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent and inefficient recession. We evaluate a ...
Working Paper
Bubbles and Leverage: A Simple and Unified Approach
In this paper, we lay out a simple framework that captures much of what the theoretical literature has to say about the role of credit in systemically important asset booms and busts. In addition, we suggest ways in which to incorporate physical investment in the bubble asset as well as monetary policy.
Speech
Is the active use of macroprudential tools institutionally realistic?
Panel remarks at the Macroprudential Monetary Policy Conference, Federal Reserve Bank of Boston, Boston, Massachusetts.
Working Paper
Real Business Cycles, Animal Spirits, and Stock Market Valuation
This paper develops a real business cycle model with five types of fundamental shocks and one "equity sentiment shock" that captures animal spirits-driven fluctuations. The representative agent's perception that movements in equity value are partly driven by sentiment turns out to be close to self-fulfilling. I solve for the sequences of shock realizations that allow the model to exactly replicate the observed time paths of U.S. consumption, investment, hours worked, the stock of physical capital, capital's share of income, and the S&P 500 market value from 1960.Q1 onwards. The ...
Journal Article
Brewing bubbles: how mortgage practices intensify housing booms
Even before the Great Recession, housing market bubbles have been associated with severe financial crises around the world. Why do these booms and busts occur? Leonard Nakamura explains that part of the answer may lie with how mortgage lending practices appear to respond to rising and falling house prices in somewhat unexpected ways.
Report
The side effects of safe asset creation
We present an incomplete markets model to understand the costs and benefits of increasing government debt in a low interest rate environment. Higher risk increases the demand for safe assets, lowering the natural rate of interest below zero, constraining monetary policy at the zero lower bound, and raising unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate and restoring full employment. While this permanently lowers investment, a policymaker committed to low inflation has no alternative. Higher inflation targets, instead, permit both full ...
Working Paper
Bubbles and the Value of Innovation
Episodes of booming innovation coincide with intense speculation in financial markets leading to bubbles—increases in market valuations and firm creation followed by a crash. We provide a framework reproducing these facts that makes a rich set of predictions on how speculation changes both the private and social values of innovation. We confirm the theory in the universe of U.S. patents issued from 1926 through 2010. Measures based on financial market information indicate that speculation increases the private value of innovation and reduces negative spillovers to competing firms. No ...
Report
Trading by Professional Traders: An Experiment
We examine how professional traders behave in two financial market experiments; we contrast professional traders’ behavior to that of undergraduate students, the typical experimental subject pool. In our first experiment, both sets of participants trade an asset over multiple periods after receiving private information about its value. Second, participants play the Guessing Game. Finally, they play a novel, individual-level version of the Guessing Game and we collect data on their cognitive abilities, risk preferences, and confidence levels. We find three differences between traders and ...