The Roots of ‘Bubbly’ Recessions

Helen Fessenden and Toan Phan

Richmond Fed Economic Brief, 2018, issue April

Abstract: A downturn following the collapse of an asset bubble ? an episode of speculative booms in asset prices ? can be severe and sustained, with output and employment often lower than in the prebubble economy. This Economic Brief considers some possible theoretical explanations. It argues, based on insights from a simple economic model, that the interaction among financial frictions, wage rigidity, and the constraints of monetary policy near the zero lower bound is a key source of inefficiency in large bubbles. One potential remedy is to regulate speculative investment on bubbly assets so that individual investors internalize their investments' effects on systemic risk.

Keywords: recession; asset bubbles; bubbles (search for similar items in EconPapers)
Date: 2018
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