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The Roots of ‘Bubbly’ Recessions

Author

Listed:
  • Helen Fessenden
  • Toan Phan

Abstract

A downturn following the collapse of an asset bubble ? an episode of speculative booms in asset prices ? can be severe and sustained, with output and employment often lower than in the prebubble economy. This Economic Brief considers some possible theoretical explanations. It argues, based on insights from a simple economic model, that the interaction among financial frictions, wage rigidity, and the constraints of monetary policy near the zero lower bound is a key source of inefficiency in large bubbles. One potential remedy is to regulate speculative investment on bubbly assets so that individual investors internalize their investments' effects on systemic risk.

Suggested Citation

  • Helen Fessenden & Toan Phan, 2018. "The Roots of ‘Bubbly’ Recessions," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, issue April.
    • Handle: RePEc:fip:fedreb:00063
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