Asset Bubbles and Aggregate Demand

Takeo Hori () and Ryonghun Im ()
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Takeo Hori: Department of Industrial Engineering and Economics, School of Engineering, Institute of Science Tokyo
Ryonghun Im: School of Economics, Kwansei Gakuin University

No 287, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: The collapse of asset bubbles leads to a demand-driven recession. When capital utilization is endogenous and capital creation is subject to idiosyncratic risks, aggregate demand significantly influences output, even with flexible prices. The bursting of bubbles causes a sharp decline in consumption and investment demand, forcing firms to reduce capital utilization. As a result, output and long-run growth contract suddenly and severely, pushing the economy into a demand recession. Nominal rigidities further deepen the downturn. Policies that stimulate aggregate demand, such as consumption and investment subsidies, can help prevent such recessions.

Keywords: asset bubbles; demand recession; capital utilization; uninsured idiosyncratic risks; flexible price; zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E44 G1 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2025-02
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