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The Macroeconomic Consequences of Asset Bubbles and Crashes

  • Shi, Lisi
  • Suen, Richard M. H.

This paper examines the macroeconomic effects of asset price bubbles and crashes in an overlapping generations economy. The model highlights the effects of asset price fluctuations on labor supply decisions, and demonstrates how labor market adjustment can help propagate the effects of these fluctuations to the aggregate economy. It is shown that, under certain conditions, asset bubbles can crowd in productive investment and lead to an expansion in total employment, and the bursting of these bubbles can have an immediate negative impact on these variables.

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File URL: https://mpra.ub.uni-muenchen.de/57045/1/MPRA_paper_57045.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 57045.

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Date of creation: Jun 2014
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Handle: RePEc:pra:mprapa:57045
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  1. Ventura, Jaume, 2012. "Bubbles and capital flows," Journal of Economic Theory, Elsevier, vol. 147(2), pages 738-758.
  2. Shi, Lisi & Suen, Richard M.H., 2014. "Asset bubbles in an overlapping generations model with endogenous labor supply," Economics Letters, Elsevier, vol. 123(2), pages 164-167.
  3. Shiller, Robert J., 2007. "Understanding Recent Trends in House Prices and Home Ownership," Working Papers 28, Yale University, Department of Economics.
  4. Luisa Fuster, 1999. "Effects of uncertain lifetime and annuity insurance on capital accumulation and growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 13(2), pages 429-445.
  5. Hillebrand, Marten, 2014. "Uniqueness of Markov equilibrium in stochastic OLG models with nonclassical production," Economics Letters, Elsevier, vol. 123(2), pages 171-176.
  6. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
  7. Eli Ofek & Matthew Richardson, 2002. "The Valuation and Market Rationality of Internet Stock Prices," Oxford Review of Economic Policy, Oxford University Press, vol. 18(3), pages 265-287.
  8. Chirinko, Robert S. & Schaller, Huntley, 1996. "Business Fixed Investment and "Bubbles": The Japanese Case," Economics Series 28, Institute for Advanced Studies.
  9. Robert Shiller, 2007. "Understanding Recent Trends in House Prices and Home Ownership," Yale School of Management Working Papers amz2557, Yale School of Management, revised 01 Nov 2007.
  10. Morand, Olivier F. & Reffett, Kevin L., 2007. "Stationary Markovian equilibrium in overlapping generation models with stochastic nonclassical production and Markov shocks," Journal of Mathematical Economics, Elsevier, vol. 43(3-4), pages 501-522, April.
  11. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  12. Olivier, Jacques, 2000. "Growth-Enhancing Bubbles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 133-51, February.
  13. Jaume Ventura & Alberto Martín, 2003. "Economic Growth with Bubbles," Working Papers 204, Barcelona Graduate School of Economics.
  14. Jie Gan, 2007. "The Real Effects of Asset Market Bubbles: Loan- and Firm-Level Evidence of a Lending Channel," Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1941-1973, November.
  15. Emmanuel Farhi & Jean Tirole, 2011. "Bubbly Liquidity," NBER Working Papers 16750, National Bureau of Economic Research, Inc.
  16. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2006. "Bubbles and capital flow volatility: Causes and risk management," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 35-53, January.
  17. Robert S. Chirinko & Huntley Schaller, 2011. "Fundamentals, Misvaluation, and Business Investment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(7), pages 1423-1442, October.
  18. Cole, Harold L & Rogerson, Richard, 1999. "Can the Mortensen-Pissarides Matching Model Match the Business-Cycle Facts?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 933-59, November.
  19. Bhattacharya, Joydeep & Andersen, Torben M, 2012. "Unfunded Pensions and Endogenous Labor Supply," Staff General Research Papers 34912, Iowa State University, Department of Economics.
  20. Philippe Weil, 1987. "Confidence and the Real Value of Money in an Overlapping Generations Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 102(1), pages 1-22.
  21. Azariadis Costas & Smith Bruce D., 1993. "Adverse Selection in the Overlapping Generations Model: The Case of Pure Exchange," Journal of Economic Theory, Elsevier, vol. 60(2), pages 277-305, August.
  22. Galor, Oded & Ryder, Harl E., 1989. "Existence, uniqueness, and stability of equilibrium in an overlapping-generations model with productive capital," Journal of Economic Theory, Elsevier, vol. 49(2), pages 360-375, December.
  23. Jacques Olivier, 2000. "Growth-Enhancing Bubbles," Post-Print hal-00460097, HAL.
  24. David N. Weil & Oded Galor, 2000. "Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond," American Economic Review, American Economic Association, vol. 90(4), pages 806-828, September.
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