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Short- and Long-run Impacts of Bursting Bubbles

Author

Listed:
  • Takeo Hori

    (Tokyo Institute of Technology)

  • Ryonghun Im

    (Kyoto University)

Abstract

Uninsured investment risks are introduced into a textbook AK model. There are no financial frictions. Depending on insurance market development, asset bubbles emerge in an infinitely-lived agent economy. A collapse of bubbles has short-run impacts. At the moment of the collapse of bubbles, aggregate demand decreases immediately. This instantly triggers sharp declines in all of GDP, consumption, investment, capital utilization, and wealth-to-GDP, although capital remains constant in the short run. Consistently with data, investment decreases more than consumption. The bubbles also has long-run impacts. The decreased investment depresses long-run growth. The economy falls into a prolonged recession.

Suggested Citation

  • Takeo Hori & Ryonghun Im, 2020. "Short- and Long-run Impacts of Bursting Bubbles," KIER Working Papers 1036, Kyoto University, Institute of Economic Research.
  • Handle: RePEc:kyo:wpaper:1036
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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP1036.pdf
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    Cited by:

    1. Santeramo, Fabio G. & Dominguez, Ignacio Perez, 2021. "On the Effects of the COVID Epidemic on Global and Local Food Access and Availability of Strategic Sectors: Role of Trade and Implications for Policymakers," Commissioned Papers 309037, International Agricultural Trade Research Consortium.
    2. Kapasia, Nanigopal & Paul, Pintu & Roy, Avijit & Saha, Jay & Zaveri, Ankita & Mallick, Rahul & Barman, Bikash & Das, Prabir & Chouhan, Pradip, 2020. "Impact of lockdown on learning status of undergraduate and postgraduate students during COVID-19 pandemic in West Bengal, India," Children and Youth Services Review, Elsevier, vol. 116(C).
    3. Li, Xuelian & Lin, Panpan & Lin, Jyh-Horng, 2020. "COVID-19, insurer board utility, and capital regulation," Finance Research Letters, Elsevier, vol. 36(C).

    More about this item

    Keywords

    asset bubbles; uninsured idiosyncratic investment risks; instant contraction; aggregate demand; prolonged recession;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G1 - Financial Economics - - General Financial Markets

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