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

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  • Jacopo Bonchi

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.

Suggested Citation

  • Jacopo Bonchi, 2017. "Secular Stagnation and Rational Bubbles: How Bubbles Postponed the Great Recession," Working Papers in Public Economics 182, Department of Economics and Law, Sapienza University of Roma.
    • Handle: RePEc:sap:wpaper:wp182
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    Cited by:

    1. Jordi Galí, 2021. "Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 121-167, April.

    More about this item

    Keywords

    Asset price bubbles; Natural interest rate; Zero lower bound;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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