Asset Price Bubbles, Imbalance In The Allocation Of Capital And Financial Crisis

In the modern world economy, financial bubbles always go hand in hand with our economic society, the generation and bursting of bubbles always bring about devastating impact. The financial crisis which breaks out in2007has spread to many countries, and has conditioned greatly the economy developing of these countries.As the crisis endures spreading, the exploration about the influences of the crisis are constantly in-depth. Under this backdrop, this paper has a wish to analyze relevant problems from an independent perspective and can do a bit of innovation both in theory and practice.In the course of this study, this paper try not to be limited to a certain kind of bubble theory, but to study the impact of the asset price bubbles on economic growth from the perspective of general equilibrium.First, by sorting through the development process of China’s financial market simply, the paper analyzes the links between economic development and the overall growth and the structure of China’s financial assets. This paper argues that it exists narrow liquidity crunch in the process of monetary in China’s economy, and analyzes the causes of this tendency from the experience level. The analysis of degree of securitization of China’s economic shows that there is hardly any correlation between the stock price movements and the Chinese people’s and consumption level China’s economic growth.Secondly, in the framework of intertemporal general equilibrium, the paper analyzes the impact of asset price bubbles on economic growth path. In the state of no asset prices bubbles and in equilibrium economy with free flow of resources and perfect competition, consumers can not benefit from the intertemporal transfer of consumption; the output and the optimal capital stock of the producer sector and financial sector have the same growth rate. The impact of financial asset price bubbles on consumption of current level is uncertain; and in the state of asset price bubbles, there are close correlations among a country’s current account, the permanent level of output, the consumer’s intertemporal preferences for consumption, the running track of asset price bubbles and the elasticity of substitution across consumption. If the economiy is under the stability and balanced growth, the capital stock of financial sector and real sector will be in a stable relationship on the ratio; when there are asset price bubbles, the capital stock of financial sector and real sector will deviate from the stable, the capital will be in an imbalance between the two sectors, and the economy will deviate from the balanced growth path. Therefore, the asset price bubbles do not have significant wealth effect and income effect to consumer’s consumption, but asset price bubbles will lead to an imbalance of capital between the financial sector and the real sector, which makes the economy deviate from the balanced growth path.Third, through the expansion of the traditional IS-LM model, this paper constructs a two-sector economy model of closed economy and open economy, and analyzes the impact of the variation of capital stock between financial sector and physical sector on consumer demand and investment demand when the economy is in equilibrium state and in imbalance state respectively,and do a simple analysis about the occurrence and transmission mechanism of financial crises under a closed economy and open economy respectively.When the financial assets price exist bubbles, theere are three paths to trigger a financial crisis from the small country perspective, such that the asset price bubbles will produce a negative impact on the domestic economy, lead to the trade surplus reducing or unsustainable deficit, and cause the financial crisis and the economy recession or depression by accelerating generation and burst of asset price bubbles because of flowing of a large number of foreign funds through the capital and financial account.From the angle of a big country, the asset price bubble will make the big country’s domestic revenue have a faster growth than the economy is in equilibrium, make the big country’s degree of financial deepen continuously, and redice the output of the real sector. When big country takes place financial crisis, it will transmit to other countries through trade spillovers effects, investment spillover effects and the monsoon conduction effects, and the financial crisis will bring about other countries to reduce exports and devaluate their currency, and makes other countries fall into asset prices declining, income levels decreasing, consumer demand reducing, investment demand decreasing, credit crunching.And the big country’s financial crisis make other countries sink into the mire of deflation, unemployment and depression.