Alejandro Justiniano, Giorgio Primiceri, Andrea Tambalotti, 31 October 2017

The US witnessed an unprecedented boom in mortgage debt and house prices in the early 2000s, which precipitated the crisis in 2007. This column documents a sudden, large and persistent fall in the spread of mortgage over Treasury rates in the summer of 2003. It argues that the emergence of this ‘conundrum’ marked a crucial turning point in the dynamics of the boom, with the resulting easier credit conditions in the subprime market in particular leading to the origination of mortgages that defaulted progressively more frequently down the road.

Eran Yashiv, 08 October 2017

The €222 million transfer of Neymar to PSG calls into question whether football superstars are a good investment. Using the financial details of the transfer, this column argues that, at the price paid, Neymar has a negative net present value. While there are other explanations for PSG's willingness to pay, in purely economic terms his contract seems a bad investment. Policymakers might use this type of calculation to justify intervening in the transfer market through regulation and taxation.

Leo de Haan, Jan Willem van den End, 29 September 2017

High asset prices can foreshadow tail risks in inflation. Based on data from 11 advanced economies since 1985, this column shows that high asset prices usually signal future high inflation episodes, but can occasionally signal low inflation or deflation instead. The transmission time of asset prices to inflation can be quite long. For central banks, this implies that the signalling content of asset prices for inflation is uncertain, both in timing and direction.

Ashoka Mody, 18 November 2016

Between the first quarter of 2013 and the end of 2015, London property prices rose rapidly, the exchange rate appreciated, and the current account deficit widened. This column argues that the rise of the pound was in fact a financial bubble, riding on a property price-exchange rate carry trade.This unsustainable bubble was deflated by Brexit.

Jason Lu, Coen Teulings, 21 October 2016

The decline in real interest rates over the past several decades has been the subject of intense policy debate. This column argues that, with the current demographic profile of large older cohorts leading to a population that is disproportionately biased towards saving, we can expect real interest rates to remain low or negative for another 10 to 15 years. The only way for the Eurozone, in particular, to accommodate these excess savings may be to raise its sovereign debt levels.

Bruno Biais, Jean-Charles Rochet, Paul Woolley, 21 August 2014

The Global Crisis has intensified debates over the merits of financial innovation and the optimal size of the financial sector. This column presents a model in which the growth of finance is driven by the development of a financial innovation. The model can help explain the securitised mortgage debacle that triggered the latest crisis, the tech bubble in the late 1990s, and junk bonds in the 1980s. A striking implication of the model is that regulation should be toughest when finance seems most robust and when innovations are waxing strongly.

Alberto Martin, Jaume Ventura, 05 July 2014

There is a widespread view among macroeconomists that fluctuations in collateral are an important driver of credit booms and busts. This column distinguishes between ‘fundamental’ collateral – backed by expectations of future profits – and ‘bubbly’ collateral – backed by expectations of future credit. Markets are generically unable to provide the optimal amount of bubbly collateral, which creates a natural role for stabilisation policies. A lender of last resort with the ability to tax and subsidise credit can design a ‘leaning against the wind’ policy that replicates the ‘optimal’ bubble allocation.

Eduardo Olaberría, 07 December 2013

Policymakers have long been concerned that large capital inflows are associated with asset-price booms. This column presents recent research showing that the composition of capital inflows also matters. The association between capital inflows and asset-price booms is about twice as strong for debt-related than for equity-related investment. Policymakers should therefore pay attention to the composition of capital inflows, since debt-related inflows may still undermine financial stability even if they do not result in an overall current-account deficit.

Jesús Fernández-Villaverde, Luis Garicano, Tano Santos, 24 March 2013

This paper studies the mechanisms through which the adoption of the euro delayed, rather than advanced, economic reforms in the Eurozone periphery and led to the deterioration of important institutions in these countries. The authors show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident.

Jaume Ventura, Vasco Carvalho, Alberto Martin, 09 September 2012

Over the last two decades, US aggregate wealth has fluctuated substantially. This column presents research that takes a first step towards measuring the reasons why. It finds that most recent fluctuations are driven by bubbles and argues that models of rational bubbles with financial frictions can improve our understanding of recent macroeconomic history.

Roger Farmer, 18 August 2011

One explanation for the 2007-09 global crisis is that consumers, markets, and politicians were gripped by “irrational exuberance” that led them to believe the record-high house prices and stock prices were sustainable. This column proposes a new explanation based on rational behaviour and microeconomic theory. It argues that however high stock prices rise, there is always an equilibrium in which they can rise further.

Daniel Gros, Stefano Micossi, Jacopo Carmassi, 13 August 2009

Why is there so much disagreement about the causes of the crisis? This column says that lax monetary policy and excessive leverage are to blame. It argues that many alleged causes are simply symptoms of these policy errors. If that is correct, then the recommended corrective is remarkably simple – there is no need for intrusive regulatory measures constraining non-bank intermediaries and innovative financial instruments.

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