IDEAS home Printed from https://ideas.repec.org/a/bla/ecinqu/v60y2022i4p1806-1832.html
   My bibliography  Save this article

Asset bubbles, unemployment, and financial market frictions

Author

Listed:
  • Ken‐ichi Hashimoto
  • Ryonghun Im
  • Takuma Kunieda
  • Akihisa Shibata

Abstract

We develop a tractable infinite horizon model of bubbles and unemployment. Our theoretical analysis proves that bubbles stimulate capital accumulation, reduce unemployment, and increase consumption. We then numerically investigate the impacts of credit constraints, labor market conditions, and redistribution policy on capital accumulation, unemployment, and welfare. Our numerical investigations show that the social welfare in the bubbly steady state is always greater than that in the bubbleless steady state even under the constrained‐optimal policy that neutralizes externalities inherent in the model. Furthermore, we find that bubbles increase welfare to a greater extent in an economy with stricter credit constraints.

Suggested Citation

  • 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.
    • Handle: RePEc:bla:ecinqu:v:60:y:2022:i:4:p:1806-1832
    DOI: 10.1111/ecin.13101
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/ecin.13101
    Download Restriction: no
    File URL: https://libkey.io/10.1111/ecin.13101?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    2. Martin Falk, 2006. "What drives business Research and Development (R&D) intensity across Organisation for Economic Co-operation and Development (OECD) countries?," Applied Economics, Taylor & Francis Journals, vol. 38(5), pages 533-547.
    3. Pol Antràs & Ricardo J. Caballero, 2009. "Trade and Capital Flows: A Financial Frictions Perspective," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 701-744, August.
    4. Vuillemey, Guillaume & Wasmer, Etienne, 2020. "Frictional unemployment with stochastic bubbles," European Economic Review, Elsevier, vol. 122(C).
    5. Ken-ichi Hashimoto & Ryonghun Im, 2019. "Asset bubbles, labour market frictions and R&D-based growth," Canadian Journal of Economics, Canadian Economics Association, vol. 52(2), pages 822-846, May.
    6. 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.
    7. Jordi Gal?, 2014. "Monetary Policy and Rational Asset Price Bubbles," American Economic Review, American Economic Association, vol. 104(3), pages 721-752, March.
    8. Philippe Aghion & Abhijit Banerjee & Thomas Piketty, 1999. "Dualism and Macroeconomic Volatility," The Quarterly Journal of Economics, Oxford University Press, vol. 114(4), pages 1359-1397.
    9. Jianjun Miao & Pengfei Wang & Lifang Xu, 2016. "Stock market bubbles and unemployment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 273-307, February.
    10. John Moore & Nobuhiro Kiyotaki, 2008. "Liquidity, Business Cycles, and Monetary Policy," 2008 Meeting Papers 35, Society for Economic Dynamics.
    11. Kunieda, Takuma, 2008. "Asset bubbles and borrowing constraints," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 112-131, January.
    12. Tomohiro Hirano & Noriyuki Yanagawa, 2017. "Asset Bubbles, Endogenous Growth, and Financial Frictions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(1), pages 406-443.
    13. repec:wop:calsdi:97-23 is not listed on IDEAS
    14. Alberto Martin & Jaume Ventura, 2012. "Economic Growth with Bubbles," American Economic Review, American Economic Association, vol. 102(6), pages 3033-3058, October.
    15. Luigi Guiso & Michael Haliassos & Tullio Jappelli, 2003. "Household stockholding in Europe: where do we stand and where do we go? [‘Limited market participation and volatility of assets prices’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(36), pages 123-170.
    16. Aoki, Kosuke & Nikolov, Kalin, 2015. "Bubbles, banks and financial stability," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 33-51.
    17. Vasco M. Carvalho & Alberto Martin & Jaume Ventura, 2012. "Understanding Bubbly Episodes," American Economic Review, American Economic Association, vol. 102(3), pages 95-100, May.
    18. Céline Rochon & Herakles Polemarchakis, 2006. "Debt, liquidity and dynamics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 179-211, January.
    19. Ken-ichi Hashimoto & Ryonghun Im, 2016. "Bubbles and unemployment in an endogenous growth model," Oxford Economic Papers, Oxford University Press, vol. 68(4), pages 1084-1106.
    20. Kazuo Mino, 2008. "Growth And Bubbles With Consumption Externalities," The Japanese Economic Review, Japanese Economic Association, vol. 59(1), pages 33-53, March.
    21. Hirano, Tomohiro & Inaba, Masaru & Yanagawa, Noriyuki, 2015. "Asset bubbles and bailouts," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 71-89.
    22. Siddhartha Biswas & Andrew Hanson & Toan Phan, 2020. "Bubbly Recessions," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(4), pages 33-70, October.
    23. Mortensen, Dale T. & Pissarides, Christopher A., 1999. "Job reallocation, employment fluctuations and unemployment," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 18, pages 1171-1228, Elsevier.
    24. Koichi Futagami & Akihisa Shibata, 2000. "Growth Effects of Bubbles in an Endogenous Growth Model," The Japanese Economic Review, Japanese Economic Association, vol. 51(2), pages 221-235, June.
    25. Luigi Guiso & Michael Haliassos & Tullio Jappelli (ed.), 2003. "Stockholding in Europe," Palgrave Macmillan Books, Palgrave Macmillan, number 978-0-230-50267-3, December.
    26. Nobuhiro Kiyotaki & John Moore, 2019. "Liquidity, Business Cycles, and Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 127(6), pages 2926-2966.
    27. King, Mervyn A. & Leape, Jonathan I., 1998. "Wealth and portfolio composition: Theory and evidence," Journal of Public Economics, Elsevier, vol. 69(2), pages 155-193, June.
    28. Roger E. A. Farmer, 2012. "Confidence, Crashes and Animal Spirits," Economic Journal, Royal Economic Society, vol. 122(559), pages 155-172, March.
    29. Kunieda, Takuma & Shibata, Akihisa, 2016. "Asset bubbles, economic growth, and a self-fulfilling financial crisis," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 70-84.
    30. Jean-Paul Fitoussi & David Jestaz & Edmund S. Phelps & Gylfi Zoega, 2000. "Roots of the Recent Recoveries: Labor Reforms or Private Sector Forces?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 237-311.
    31. Pan, Wei-Fong, 2020. "How Does The Macroeconomy Respond To Stock Market Fluctuations? The Role Of Sentiment," Macroeconomic Dynamics, Cambridge University Press, vol. 24(2), pages 421-446, March.
    32. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
    33. repec:hal:spmain:info:hdl:2441/5571 is not listed on IDEAS
    34. Edmund S. Phelps, 1999. "Behind This Structural Boom: The Role of Asset Valuations," American Economic Review, American Economic Association, vol. 89(2), pages 63-68, May.
    35. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-1370, November.
    36. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 3-19, February.
    37. Garey Ramey & Wouter J. den Haan & Joel Watson, 2000. "Job Destruction and Propagation of Shocks," American Economic Review, American Economic Association, vol. 90(3), pages 482-498, June.
    38. Hanson, Andrew & Phan, Toan, 2017. "Bubbles, wage rigidity, and persistent slumps," Economics Letters, Elsevier, vol. 151(C), pages 66-70.
    39. Philippe Weil, 1987. "Confidence and the Real Value of Money in an Overlapping Generations Economy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(1), pages 1-22.
    40. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    41. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 173-222.
    42. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
    43. Christopher A. Pissarides, 2009. "The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer?," Econometrica, Econometric Society, vol. 77(5), pages 1339-1369, September.
    44. Mitsui, Toshihide & Watanabe, Shinichi, 1989. "Monetary growth in a turnpike environment," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 123-137, July.
    45. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
    46. Bean, Charles & Pissarides, Christopher, 1993. "Unemployment, consumption and growth," European Economic Review, Elsevier, vol. 37(4), pages 837-854, May.
    47. Hashimoto, Ken-ichi & Im, Ryonghun & Kunieda, Takuma, 2020. "Asset Bubbles, Unemployment, and a Financial Crisis," Journal of Macroeconomics, Elsevier, vol. 65(C).
    48. repec:hal:wpspec:info:hdl:2441/5571 is not listed on IDEAS
    49. Matsuoka, Tarishi & Shibata, Akihisa, 2012. "Asset bubbles, credit market imperfections, and technology choice," Economics Letters, Elsevier, vol. 116(1), pages 52-55.
    50. Aghion, Philippe & Banerjee, Abhijit, 2005. "Volatility and Growth," OUP Catalogue, Oxford University Press, number 9780199248612, Decembrie.
    51. Arthur J. Hosios, 1990. "On The Efficiency of Matching and Related Models of Search and Unemployment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 279-298.
    52. Peter A. Diamond, 1982. "Wage Determination and Efficiency in Search Equilibrium," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(2), pages 217-227.
    53. Kunieda, Takuma, 2014. "A note on the crowd-in effect of asset bubbles in the perpetual youth model," Mathematical Social Sciences, Elsevier, vol. 72(C), pages 50-54.
    54. Hirano, Tomohiro & Inaba, Masaru & Yanagawa, Noriyuki, 2015. "Asset bubbles and bailouts," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 71-89.
    55. repec:oup:restud:v:84:y::i:1:p:406-443. is not listed on IDEAS
    56. Futagami, Koichi & Shibata, Akihisa, 1999. "Welfare effects of bubbles in an endogenous growth model," Research in Economics, Elsevier, vol. 53(4), pages 381-403, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.
    2. Zhang, Xiaoming & Wei, Chunyan & Lee, Chien-Chiang & Tian, Yiming, 2023. "Systemic risk of Chinese financial institutions and asset price bubbles," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).
    3. Francisco Queirós, 2024. "The real side of stock market exuberance: bubbles, output and productivity at the industry level," Economica, London School of Economics and Political Science, vol. 91(361), pages 268-291, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hashimoto, Ken-ichi & Im, Ryonghun & Kunieda, Takuma, 2020. "Asset Bubbles, Unemployment, and a Financial Crisis," Journal of Macroeconomics, Elsevier, vol. 65(C).
    2. Takuma Kunieda & Tarishi Matsuoka & Akihisa Shibata, 2017. "Asset Bubbles, Technology Choice, and Financial Crises," Discussion Paper Series 157, School of Economics, Kwansei Gakuin University, revised Feb 2017.
    3. Kunieda, Takuma & Shibata, Akihisa, 2012. "Asset bubbles, economic growth, and a self-fulfilling financial crisis: a dynamic general equilibrium model of infinitely lived heterogeneous agents," MPRA Paper 37309, University Library of Munich, Germany.
    4. Ken‐ichi Hashimoto & Ryonghun Im, 2019. "Asset bubbles, labour market frictions and R&D‐based growth," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 52(2), pages 822-846, May.
    5. Kunieda, Takuma & Shibata, Akihisa, 2016. "Asset bubbles, economic growth, and a self-fulfilling financial crisis," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 70-84.
    6. Ken-ichi Hashimoto & Ryonghun Im, 2016. "Bubbles and unemployment in an endogenous growth model," Oxford Economic Papers, Oxford University Press, vol. 68(4), pages 1084-1106.
    7. Alberto Martin & Jaume Ventura, 2018. "The Macroeconomics of Rational Bubbles: A User's Guide," Annual Review of Economics, Annual Reviews, vol. 10(1), pages 505-539, August.
    8. Siddhartha Biswas & Andrew Hanson & Toan Phan, 2020. "Bubbly Recessions," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(4), pages 33-70, October.
    9. Michau, Jean-Baptiste & Ono, Yoshiyasu & Schlegl, Matthias, 2023. "Wealth preference and rational bubbles," European Economic Review, Elsevier, vol. 156(C).
    10. Kunieda, Takuma, 2014. "A note on the crowd-in effect of asset bubbles in the perpetual youth model," Mathematical Social Sciences, Elsevier, vol. 72(C), pages 50-54.
    11. Hirano, Tomohiro & Toda, Alexis Akira, 2024. "Bubble economics," LSE Research Online Documents on Economics 122042, London School of Economics and Political Science, LSE Library.
    12. Hirano, Tomohiro & Inaba, Masaru & Yanagawa, Noriyuki, 2015. "Asset bubbles and bailouts," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 71-89.
    13. Hashimoto, Ken-ichi & Im, Ryonghun & Kunieda, Takuma & Shibata, Akihisa, 2022. "Financial destabilization," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    14. Guillaume Vuillemey & Etienne Wasmer, 2016. "Frictional Unemployment and Stochastic Bubbles," Working Papers hal-03393187, HAL.
    15. Vuillemey, Guillaume & Wasmer, Etienne, 2020. "Frictional unemployment with stochastic bubbles," European Economic Review, Elsevier, vol. 122(C).
    16. Guillaume Vuillemey & Etienne Wasmer, 2016. "Frictional Unemployment and Stochastic Bubbles," SciencePo Working papers hal-03393187, HAL.
    17. repec:hal:spmain:info:hdl:2441/3tjqcugffh9i1qqufo79qh86il is not listed on IDEAS
    18. Hori, Takeo & Im, Ryonghun, 2023. "Asset bubbles, entrepreneurial risks, and economic growth," Journal of Economic Theory, Elsevier, vol. 210(C).
    19. Miao, Jianjun & Wang, Pengfei & Zhou, Jing, 2015. "Asset bubbles, collateral, and policy analysis," Journal of Monetary Economics, Elsevier, vol. 76(S), pages 57-70.
    20. Matthias S. Hertweck & Vivien Lewis & Stefania Villa, 2021. "Going the Extra Mile: Effort by Workers and Job‐Seekers," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(8), pages 2099-2127, December.
    21. Chenxi Wang, 2023. "Asset bubbles and frictional intermediation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(3), pages 921-961, October.

    More about this item

    JEL classification:

    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:ecinqu:v:60:y:2022:i:4:p:1806-1832. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/weaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.