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Are there any econometric theories or models to explain the recurrent bubbles of modern economies?

I did some simulations with Markov chains back in 2000, and you can see the results at http://www.datashaping.com/finance_virtual.shtml. It's about a "neutral" simulated stock market (no up or down trend) that is not controlled, and despite the absence of trends, the swings - up and down - are very wild.

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Hi All,

There are two econometric techniques primarily use for estimating the pattern and trend in the current economy is Least squares Regression and Time series analysis.

Estimating the trend and seasonality, checking the stationarity, AR, MA coefficients adjustments, Box Cox transformations, Log values, events etc. will give the some kind of accurate predictions.
Not sure of the triggering/leading indicators, but several people (with an economic background very different than most -- aka Ludwig Von Mises) accurately predicted the recession and the bursting of several of the bubbles.

See Peter Schiff's predictions on Fox News back in 2006. http://www.youtube.com/watch?v=2I0QN-FYkpw
Peter Schiff indeed was explaining the basic failings very clearly based on first principles. Robert Shiller, the economist behind the Case-Shiller house price index was also warning about the unsustainable house price increases. See his Wikipedia page:

On CNBC's "How to Profit from the Real Estate Boom" in 2005, he noted that housing price rises could not outstrip inflation in the long term because, except for land restricted sites, house prices would tend toward building costs plus normal economic profit. Co-panelist David Lereah disagreed. In February, Lereah had put out his book Are You Missing the Real Estate Boom? signaling the market top for housing prices. While Shiller repeated his precise timing again for another market bubble, because the general level of nationwide residential real estate prices do not reveal themselves until after a lag of about one year, people did not believe Shiller had called another top until late 2006 and early 2007.

It could not be said, however, that Robert Shiller foresaw the economic disaster that would come of the real estate boom. In his 2003 Brookings paper, "Is There a Bubble in the Housing Market?", Shiller wrote “I think that there are at least eight reasons to question the existence, or at least the importance, of a bubble in the housing market.”


The fundamental problem with economic models IMHO is similar to weather models in the sense that they cannot take into account all the inputs that have an impact on the dynamics of the model. This leads to widely varying interpretations of the output of economic models where everybody conveniently disregards all that doesn't fit a preconceived notion.

It would be nice to hear from an economist how the field deals with these dissonants. Asymptotic analysis does shed light on complex behaviors but the underlying assumptions are quickly lost. Are Markov Chains used to quantify the probability of hopping between strange attractors? Are these complex systems mapped as such? Love to learn more about the models that the Fed or the IMF are using.

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