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Bubbly Recessions

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  • Siddhartha Biswas
  • Andrew Hanson
  • Toan Phan

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."

Suggested Citation

  • Siddhartha Biswas & Andrew Hanson & Toan Phan, 2020. "Bubbly Recessions," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(4), pages 33-70, October.
    • Handle: RePEc:aea:aejmac:v:12:y:2020:i:4:p:33-70
    DOI: 10.1257/mac.20180083
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    Cited by:

    1. Pablo A. Guerron-Quintana & Tomohiro Hirano & Ryo Jinnai, 2019. "Recurrent Bubbles and Economic Growth," CARF F-Series CARF-F-457, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    2. Ken‐ichi Hashimoto & Ryonghun Im & Takuma Kunieda & Akihisa Shibata, 2022. "Asset bubbles, unemployment, and financial market frictions," Economic Inquiry, Western Economic Association International, vol. 60(4), pages 1806-1832, October.
    3. Illing, Gerhard & Ono, Yoshiyasu & Schlegl, Matthias, 2018. "Credit booms, debt overhang and secular stagnation," European Economic Review, Elsevier, vol. 108(C), pages 78-104.
    4. Feng Dong & Jianjun Miao & Pengfei Wang, 2020. "Asset Bubbles and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 68-98, August.
    5. V. Filipe Martins-da-Rocha & Toan Phan & Yiannis Vailakis, 2019. "Debt Limits and Credit Bubbles in General Equilibrium," Working Paper 19-19, Federal Reserve Bank of Richmond.
    6. Matthias Schlegl, 2018. "Secular Stagnation in an Economy with Land," ISER Discussion Paper 1032, Institute of Social and Economic Research, Osaka University.
    7. Jacopo Bonchi, 2023. "Asset Price Bubbles and Monetary Policy: Revisiting the Nexus at the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 186-203, January.
    8. Andrea Ajello & Nina Boyarchenko & François Gourio & Andrea Tambalotti, 2022. "Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms," Staff Reports 1002, Federal Reserve Bank of New York.
    9. Pablo A. Guerron-Quintana & Tomohiro Hirano & Ryo Jinnai, 2021. "Bubbles, Crashes, Ups and Downs in Economic Growth Theory and Evidence," CIGS Working Paper Series 21-006E, The Canon Institute for Global Studies.
    10. Michau, Jean-Baptiste & Ono, Yoshiyasu & Schlegl, Matthias, 2023. "Wealth preference and rational bubbles," European Economic Review, Elsevier, vol. 156(C).
    11. Jacopo Bonchi, 2023. "Asset Price Bubbles and Monetary Policy: Revisiting the Nexus at the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 47, pages 186-203, January.
    12. Gadi Barlevy, 2018. "Bridging Between Policymakers’ and Economists’ Views on Bubbles," Economic Perspectives, Federal Reserve Bank of Chicago, issue 4, pages 1-21.

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    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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