Paul Krugman writes:
The night they reread Minsky: Brad DeLong offers a neat little model of speculative fluctuations in asset prices, based on the idea that investors gradually switch strategies based on what seems to work for other people: if people buying stocks seem to be doing well, more people move into stocks, driving up prices and making stocks look even more attractive. It’s very close to Shiller’s notion of bubbles as natural Ponzi schemes. And Brad’s version is very much what I was saying in this piece written in 1999 — one I had a lot of fun writing.
What’s missing, as Brad himself points out, is the asymmetry of booms and crashes. What he doesn’t say is that what we really need is a model that can produce a Minsky moment — the point at which margin calls force deleveraging.
I’ll be giving the Robbins Lectures at the LSE next month. The title of this post is also the title of my third lecture. I hope I actually have a model by then
Paul is talking about my April 21, 2009 Economics 202b lecture on bubbles:
Let us begin with a very long quote from Chrles Kindleberger, who in turn begins with Hyman Minsky....
[Kindleberger] is, I think, right. And here I have a problem. For it is pretty clear to me that the conventional model of bubbles is not terribly illuminating as a model of this process. The conventional model of bubbles starts with the assumption of a constant required rate of return r. It continues with a one-period equilibrium condition for the price of an asset paying a dividend dt. If there is even one rational, utility-maximizing agent in the economy, than for that agent...
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