Bubbly Recessions
Keyword(s):
Ex Ante
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We develop a tractable bubbles model with financial friction 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.” (JEL E22, E24, E32, E44, L26)
Keyword(s):
2000 ◽
Vol 90
(5)
◽
pp. 1432-1446
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1992 ◽
Vol 52
(2)
◽
pp. 454-456
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Keyword(s):