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Stock Market Bubbles and Unemployment

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  • 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.)

Abstract

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.

Suggested Citation

  • Jianjun Miao & PENGFEI WANG & Lifang Xu, 2012. "Stock Market Bubbles and Unemployment," Boston University - Department of Economics - Working Papers Series WP2012-011, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2012-011
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pengfei Wang & Jing Zhou & Jianjun Miao, 2015. "Housing Bubbles and Policy Analysis," 2015 Meeting Papers 1056, Society for Economic Dynamics.
    2. Toan Phan & Andrew Hanson & Siddhartha Biswas, 2018. "Bubbly Recessions," 2018 Meeting Papers 440, Society for Economic Dynamics.
    3. Biswas, Siddhartha & Hanson, Andrew & Phan, Toan, 2018. "Bubbly Recessions," Working Paper 18-5, Federal Reserve Bank of Richmond.
    4. Pengfei Wang & Jianjun Miao, 2011. "Bubbles and Credit Constraints," 2011 Meeting Papers 94, Society for Economic Dynamics.
    5. Benhabib, Jess & Wang, Pengfei, 2013. "Financial constraints, endogenous markups, and self-fulfilling equilibria," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 789-805.
    6. Guillaume Vuillemey & Etienne Wasmer, 2016. "Frictional Unemployment and Stochastic Bubbles," Sciences Po publications 10265, Sciences Po.
    7. Kaas, Leo & Pintus, Patrick A. & Ray, Simon, 2016. "Land collateral and labor market dynamics in France," European Economic Review, Elsevier, vol. 84(C), pages 202-218.
    8. repec:eee:ecofin:v:44:y:2018:i:c:p:34-43 is not listed on IDEAS
    9. repec:mgt:youmgt:v:15:y:2017:i:3:p:231-254 is not listed on IDEAS
    10. Vuillemey, Guillaume & Wasmer, Etienne, 2016. "Frictional Unemployment with Stochastic Bubbles," CEPR Discussion Papers 11561, C.E.P.R. Discussion Papers.
    11. Miao, Jianjun & Wang, Pengfei, 2015. "Banking bubbles and financial crises," Journal of Economic Theory, Elsevier, vol. 157(C), pages 763-792.
    12. Andrew Phiri, 2017. "The Unemployment-Stock Market Relationship in South Africa: Evidence from Symmetric and Asymmetric Cointegration Models," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 15(3 (Fall)), pages 231-254.
    13. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2013. "Gegen eine rückwärtsgewandte Wirtschaftspolitik. Jahresgutachten 2013/14," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201314.
    14. Zhiwei Xu & Pengfei Wang & Jianjun Miao, 2013. "A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles," 2013 Meeting Papers 167, Society for Economic Dynamics.

    More about this item

    Keywords

    stock market bubbles; unemployment; self-fulfilling beliefs; credit constraints; multiple equilibria;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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