“Financial Bubbles” Theory and Financial Crises

In the micro frame, the financial bubble is that the current price of the asset increases continually, and deviates from its fundemantal value. In the bubble the incrase in the price is so important and permanent that it causes a very strong expectation in the market as the increase in the price continues in the future. In the macro frame, the bubble is that the increase rate (%) in the asset real price index exceeds the real economic growth rate (%) significally in the same country and period. The bubble disrupts distribution of the resource and decreases “effiency” of market. Thus, even if it doesn’t burst, the bubble causes very serious and negative affects in the real economy, and consequently decrease the actual (occurred) and real economic growth. The bubble, if it burst, at least leads to a sharp decline in the asset prices but it can trigger a financial crisis also. Previously the bubble’s theories had been mainly built in order to explain the price bubbles in the stock market. However, the bubble’s theories are used in order to explain the price bubbles occurred in all asset markets, includs stock market also, and real estate (house) markets. In our papper at first the bubble was defined theoretically and the theories of bubble vere examined. Later the stages of occurrence of the bubble were scrutinized and its affects on the real economy were argued. Subsequently, the matter as “reactive or proactive strategy” in the monetarist policy in regard to the financial bubble was discussed. Afterwards, the various definitions were examined and an appropriate amprical definition was tried in order to describe the cases of bubble and bubble’s burst. Finally, the occurrences of bubbles that 3 Latin American countries (Brazil, Argentine, and Mexico) experienced since 1990 were defined and studied amprically. In the conclusion’s part of the papper, some results we arrived were counted.