Growth Cycles and Market Crashes |
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| Institution: | 1. University Bonn, Department of Economics, Institute for Microeconomics, Adenauer Allee 24-42, D-53113 Bonn, Germany;2. Humboldt-Universität zu Berlin, Institute for Economic Theory 1, Spandauer Str. 1, D-10178 Berlin, Germany;1. University Bonn, Department of Economics, Institute for Microeconomics, Adenauer Allee 24-42, D-53113 Bonn, Germany;2. Humboldt-Universität zu Berlin, Institute for Economic Theory 1, Spandauer Str. 1, D-10178 Berlin, Germany;1. Argonne National Laboratory, Argonne, IL 60439, USA;2. Arizona State University, Tempe, AZ 85287-1504, USA;3. California State University, Dominguez Hills, Carson, CA 90747, USA;4. Canisius College, Buffalo, NY, USA;5. Carnegie Mellon University, Pittsburgh, PA 15213, USA;6. Catholic University of America, Washington DC 20064, USA;7. CEA, Centre de Saclay, Irfu/Service de Physique Nucléaire, 91191 Gif-sur-Yvette, France;8. University of Connecticut, Storrs, CT 06269, USA;9. Fairfield University, Fairfield, CT 06824, USA;10. Florida International University, Miami, FL 33199, USA;11. Florida State University, Tallahassee, FL 32306, USA;12. Università di Genova, 16146 Genova, Italy;13. The George Washington University, Washington, DC 20052, USA;14. Idaho State University, Pocatello, ID 83209, USA;15. INFN, Sezione di Ferrara, 44100 Ferrara, Italy;p. INFN, Laboratori Nazionali di Frascati, 00044 Frascati, Italy;q. INFN, Sezione di Genova, 16146 Genova, Italy;r. INFN, Sezione di Roma Tor Vergata, 00133 Rome, Italy;s. INFN, Sezione di Torino, 10125 Torino, Italy;t. Institut de Physique Nucléaire, CNRS/IN2P3 and Université Paris Sud, Orsay, France;u. Institute of Theoretical and Experimental Physics, Moscow, 117259, Russia;v. James Madison University, Harrisonburg, VA 22807, USA;w. Kyungpook National University, Daegu 702-701, Republic of Korea;x. University of Massachusetts Dartmouth, Dartmouth, MA 02747, USA;y. Montgomery College, Rockville, MD 20850, USA;z. NRC “Kurchatov Institute”, PNPI, 188300, Gatchina, Russia;11. University of New Hampshire, Durham, NH 03824-3568, USA;12. Norfolk State University, Norfolk, VA 23504, USA;13. Ohio University, Athens, OH 45701, USA;14. Old Dominion University, Norfolk, VA 23529, USA;15. Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA;16. Università di Roma Tor Vergata, 00133 Rome, Italy;17. Universität Bonn, 53115 Bonn, Germany;18. Skobeltsyn Institute of Nuclear Physics, Lomonosov Moscow State University, 119234 Moscow, Russia;19. University of South Carolina, Columbia, SC 29208, USA;110. Temple University, Philadelphia, PA 19122, USA;111. Thomas Jefferson National Accelerator Facility, Newport News, VA 23606, USA;112. Universidad Técnica Federico Santa María, Casilla 110-V Valparaíso, Chile;113. Edinburgh University, Edinburgh EH9 3JZ, United Kingdom;114. University of Glasgow, Glasgow G12 8QQ, United Kingdom;115. Virginia Tech, Blacksburg, VA 24061-0435, USA;1p. University of Virginia, Charlottesville, VA 22901, USA;1q. College of William and Mary, Williamsburg, VA 23187-8795, USA;1r. Yerevan Physics Institute, 375036 Yerevan, Armenia |
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| Abstract: | Market booms are often followed by dramatic falls. To explain this requires an asymmetry in the underlying shocks. A straightforward model of technological progress generates asymmetries that are also the source of growth cycles. Assuming a representative consumer, we show that the stock market generally rises, punctuated by occasional dramatic falls. With high risk aversion, bad news causes dramatic increases in prices. Bad news does not correspond to a contraction of existing production possibilities, but to a slowdown in its expansion. This economy provides a model of endogenous growth cycles in which recoveries and recessions are dictated by the adoption of innovations. Journal of Economic Literature Classification Numbers: O40, G12, O41, O30. |
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