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Stock Market Bubbles and Unemployment

Listed author(s):
  • 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
Handle: RePEc:bos:wpaper:wp2012-011
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Web page: http://www.bu.edu/econ/

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