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Pronounced and persistent fluctuations in aggregate wealth and real activity - boom-bust episodes - have become more prevalent in recent history. In this paper I provide a quantitative explanation for such boom-bust episodes with an overlapping generations model featuring many generations, financial frictions, aggregate uncertainty and - most importantly - rational bubbles. The model captures different channels through which bubbles affect the real economy. I show that the bubble-creation channel, which is based on Martin and Ventura (2012, 2016), is necessary in order for the calibrated model to generate plausible bubble-driven business cycles. I then apply the model to replicate the observed series of real output and aggregate wealth during the two recent US boom-bust episodes between 1990 and 2010. By decomposing the model-implied series for aggregate wealth I show that almost all of the fluctuations in aggregate wealth can be explained as a result of stochastic rational bubbles.
