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Asset Bubbles, Unemployment, and a Financial Crisis

Takuma Kunieda (), Ken-ichi Hashimoto and Ryonghun Im ()
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Ryonghun Im: Graduate School of Economics, Kobe University

No 156, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: A tractable model with asset bubbles is presented to demonstrate that a financial crisis caused by a bubble bursting increases unemployment rates. A bubbly asset has a positive market value because purchasing the asset is the sole saving method for agents who draw insufficient productivity, whereas selling the asset is a fund-raising method to initiate an investment project. The presence of bubbles corrects allocative inefficiency, relocating investment resources from low-productivity agents to high-productivity agents. Accordingly, the presence of bubbles can promote capital accumulation and reduce unemployment rates. However, a self-fulfilling financial crisis would result in high unemployment rates.

Keywords: Overlapping generations; Labor market friction; Borrowing constraints; Asset bubbles; Unemployment (search for similar items in EconPapers)
JEL-codes: J64 O41 O42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-lab
Date: 2017-02, Revised 2017-02
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