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Bubbly Recessions

Siddhartha Biswas, Andrew Hanson and Toan Phan ()

No 18-5, Working Paper from Federal Reserve Bank of Richmond

Abstract: We develop a tractable rational bubbles model with financial frictions, downward nominal wage rigidity, and the zero lower bound. The interaction of financial frictions and nominal rigidities leads to a \"bubbly pecuniary externality,\" where competitive speculation in risky bubbly assets can result in excessive investment booms that precede inefficient busts. The collapse of a large 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 and inefficient recession. We evaluate a macroprudential leaning-against-the-bubble policy that balances the trade-off between the booms and busts of bubbles.

Keywords: recessions; bubbles; secular stagnation (search for similar items in EconPapers)
JEL-codes: E10 E21 E40 E44 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2018-02-22
New Economics Papers: this item is included in nep-dge and nep-mac
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