Short- and Long-run Impacts of Bursting Bubbles

Takeo Hori (hori.t.ag@m.titech.ac.jp.) and Ryonghun Im (ryonghunim@gmail.com)
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Takeo Hori: Tokyo Institute of Technology
Ryonghun Im: Kyoto University

No 1036, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: Uninsured investment risks are introduced into a textbook AK model. There are no financial frictions. Depending on insurance market development, asset bubbles emerge in an infinitely-lived agent economy. A collapse of bubbles has short-run impacts. At the moment of the collapse of bubbles, aggregate demand decreases immediately. This instantly triggers sharp declines in all of GDP, consumption, investment, capital utilization, and wealth-to-GDP, although capital remains constant in the short run. Consistently with data, investment decreases more than consumption. The bubbles also has long-run impacts. The decreased investment depresses long-run growth. The economy falls into a prolonged recession.

Keywords: asset bubbles; uninsured idiosyncratic investment risks; instant contraction; aggregate demand; prolonged recession (search for similar items in EconPapers)
JEL-codes: E32 E44 G1 (search for similar items in EconPapers)
Pages: 60pages
Date: 2020-08
New Economics Papers: this item is included in nep-fdg, nep-ias, nep-mac and nep-ore
References: View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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