Bubbles and unemployment in an endogenous growth model
We construct a continuous-time overlapping-generations model with labour market frictions to examine the relationships among unemployment, asset bubbles, and economic growth. We show that the existence of asset bubbles is contingent upon the unemployment rate: a bubble (non-bubble) regime arises in equilibrium when unemployment is relative low (high). Our framework focuses on the boom and bust of asset bubbles caused by changes in fundamental variables, not a stochastic probability. Then, as labour market frictions generate a negative relationship between the unemployment rate and economic growth, we find that the bubble regime exhibits a higher growth rate than the non-bubble regime. Furthermore, we show that policy or parameter changes that have a positive influence on the labour market shift the economy from a non-bubble regime to a bubble regime.
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Volume (Year): 68 (2016)
Issue (Month): 4 ()
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