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Bubbly Recessions

  • Siddhartha Biswas
  • Andrew Hanson
  • Toan Phan
American Economic Journal: Macroeconomics
vol. 12, no. 4, October 2020
(pp. 33-70)
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Abstract

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."

Citation

Biswas, Siddhartha, Andrew Hanson, and Toan Phan. 2020. "Bubbly Recessions." American Economic Journal: Macroeconomics, 12 (4): 33-70. DOI: 10.1257/mac.20180083

Additional Materials

JEL Classification

  • E22 Investment; Capital; Intangible Capital; Capacity
  • E24 Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
  • E32 Business Fluctuations; Cycles
  • E44 Financial Markets and the Macroeconomy
  • L26 Entrepreneurship
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