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Stock Market Bubbles and Unemployment

  • Jianjun Miao

    ()

    (Department of Economics, Boston University, CEMA, Central University of Finance and Economics, and AFR, Zhejiang University)

  • PENGFEI WANG

    ()

    (Department of Economics, Hong Kong University of Science and Technology, ClearWater Bay, Hong Kong.)

  • Lifang Xu

    ()

    (Department of Economics, Hong Kong University of Science and Technology, ClearWater Bay, Hong Kong.)

This paper introduces endogenous credit constraints in a search model of unemployment. These constraints generate multiple equilibria supported by self-fulfilling beliefs. A stock market bubble exists through a positive feedback loop mechanism. The collapse of the bubble tightens the credit constraints, causing firms to reduce investment and hirings. Unemployed workers are hard to find jobs generating high and persistent unemployment.

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File URL: http://people.bu.edu/miaoj/Bubbleunemploy08.pdf
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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2012-011.

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Length: 46 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:bos:wpaper:wp2012-011
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  1. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
  2. Farmer, Roger E A, 2011. "The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence," CEPR Discussion Papers 8617, C.E.P.R. Discussion Papers.
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  4. Chao Gu & Randall Wright, 2011. "Endogenous credit cycles," Working Papers 689, Federal Reserve Bank of Minneapolis.
  5. Olivier Blanchard & Jordi Galí, 2010. "Labor Markets and Monetary Policy: A New Keynesian Model with Unemployment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 1-30, April.
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  7. Jianjun Miao & PENGFEI WANG, 2011. "Sectoral Bubbles and Endogenous Growth," Boston University - Department of Economics - Working Papers Series WP2011-032, Boston University - Department of Economics.
  8. Vidhan K. Goyal & Takeshi Yamada, 2004. "Asset Price Shocks, Financial Constraints, and Investment: Evidence from Japan," The Journal of Business, University of Chicago Press, vol. 77(1), pages 175-200, January.
  9. Yu Zhu & Randall Wright & Chao He, 2012. "Housing and Liquidity," 2012 Meeting Papers 94, Society for Economic Dynamics.
  10. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
  11. Randall Wright & Guillaume Rocheteau, 2011. "Liquidity and Asset Market Dynamics," 2011 Meeting Papers 103, Society for Economic Dynamics.
  12. Pengfei Wang & Jianjun Miao, 2011. "Bubbles and Credit Constraints," 2011 Meeting Papers 94, Society for Economic Dynamics.
  13. Weil, Philippe, 1987. "Confidence and the Real Value of Money in an Overlapping Generations Economy," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 1-22, February.
  14. Farmer, Roger, 2010. "How the Economy Works: Confidence, Crashes, and Self-Fulfilling Prophecies," OUP Catalogue, Oxford University Press, number 9780195397918.
  15. A. Senhadji Semlali & Charles Collyns, 2002. "Lending Booms, Real Estate Bubbles and the Asian Crisis," IMF Working Papers 02/20, International Monetary Fund.
  16. Merz, Monika, 1995. "Search in the labor market and the real business cycle," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 269-300, November.
  17. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
  18. Farmer, Roger E A, 2010. "Animal Spirits, Persistent Unemployment and the Belief Function," CEPR Discussion Papers 8100, C.E.P.R. Discussion Papers.
  19. Rui Albuquerque & Hugo Hopenhayn, 2002. "Optimal Lending Contracts and Firm Dynamics," RCER Working Papers 493, University of Rochester - Center for Economic Research (RCER).
  20. Diamond, Peter A, 1982. "Aggregate Demand Management in Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 90(5), pages 881-94, October.
  21. Jianjun Miao & PENGFEI WANG, 2011. "Bubbles and Total Factor Productivity," Boston University - Department of Economics - Working Papers Series WP2011-030, Boston University - Department of Economics.
  22. Farmer, Roger E.A., 2010. "How to reduce unemployment: A new policy proposal," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 557-572, July.
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  24. Pissarides, Christopher A, 1985. "Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages," American Economic Review, American Economic Association, vol. 75(4), pages 676-90, September.
  25. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  26. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," Review of Economic Studies, Oxford University Press, vol. 71(2), pages 285-315.
  27. Jianjun Miao & PENGFEI WANG, 2012. "Banking Bubbles and Financial Crisis," Boston University - Department of Economics - Working Papers Series WP2012-010, Boston University - Department of Economics.
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