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Secular Stagnation and Rational Bubbles: How Bubbles Postponed the Great Recession

Jacopo Bonchi

No 182, Working Papers from University of Rome La Sapienza, Department of Public Economics

Abstract: By introducing rational bubbles in the model of Eggertsson et al. (2017), I show how their presence prevents secular stagnation, despite structural changes putting downward pressure on interest rates. Bubbles push interest rates up and allow to avoid the ZLB. The two mechanisms at work are the saving channel and the borrowing channel, which relate to the twofold function of bubbly assets: store of value and collateral. The reallocation of resources implemented through these channels implies welfare losses. These results shed light on the US economic performance before the 2007-2008 crisis.

Keywords: Asset price bubbles; Natural interest rate; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E13 E44 (search for similar items in EconPapers)
Pages: 40
Date: 2017-09
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