Bubbly Recessions

Siddhartha Biswas, Andrew Hanson and Toan Phan
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Siddhartha Biswas: University of North Carolina, Chapel Hill
Andrew Hanson: University of North Carolina Chapel Hill

No 116, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a tractable bubbles model with financial frictions 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.”

Date: 2019
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Related works:
Journal Article: Bubbly Recessions (2020)
Working Paper: Bubbly Recessions (2018)
Working Paper: Bubbly Recessions (2018)
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