Bubbly Recessions

Siddhartha Biswas, Andrew Hanson and Toan Phan

American Economic Journal: Macroeconomics, 2020, vol. 12, issue 4, 33-70

Abstract: We develop a tractable bubbles model with financial friction and downward wage rigidity. Competitive speculation in risky bubbles can result in excessive investment booms that precede inefficient busts, where post- bubble aggregate economic activities collapse below the pre-bubble trend. Risky bubbles can reduce ex ante social welfare, and leaning-against-the-bubble policies that balance the boom-bust trade-off can be warranted. We further show that the collapse of a bubble can push the economy into a "secular stagnation" equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent recession, such as the Japanese "lost decades."

JEL-codes: E22 E24 E32 E44 L26 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Bubbly Recessions (2019)
Working Paper: Bubbly Recessions (2018)
Working Paper: Bubbly Recessions (2018)
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DOI: 10.1257/mac.20180083

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