Asset Bubbles, Unemployment, and a Financial Crisis

Abstract

A tractable model with asset bubbles is presented to demonstrate that a financial crisis caused by a bubble bursting increases unemployment rates. A bubbly asset has a positive market value because purchasing the asset is the sole saving method for agents who draw insufficient productivity, whereas selling the asset is a fund-raising method to initiate an investment project. The presence of bubbles corrects allocative inefficiency, relocating investment resources from low-productivity agents to high-productivity agents. Accordingly, the presence of bubbles can promote capital accumulation and reduce unemployment rates. However, a self-fulfilling financial crisis would result in high unemployment rates.

Asset Bubbles, Unemployment, and Financial Market Frictions

“…From Eqs. 14, (17), (22), ρ t Z t = f (k t )k t Ψ(k t )N , and the aggregate tax revenue from entrepreneurs, Eq. (C.3) can be rewritten as…”

Asset bubbles, unemployment, and financial market frictions

“…In the model of Hashimoto et al. (2020), although the financial market is imperfect and the presence of bubbles promotes capital accumulation, they cannot investigate how the extent of financial frictions affects unemployment when bubbles are present because agents cannot borrow in the financial market, unlike in the current paper. Introducing downward wage rigidity, Hanson and Phan (2017) and Biswas et al.…”

“…Hashimoto and Im (2016, 2019) and Hashimoto et al. (2020) introduce labor market frictions into overlapping generations (OLG) models to study the effect of bubbles on both capital accumulation and unemployment. In the models of Hashimoto and Im (2016, 2019), because the financial market is perfect, bubbles have only crowding‐out effects on capital accumulation 5 .…”

“…In the models of Im (2016, 2019), because the financial market is perfect, bubbles have only crowding-out effects on capital accumulation. 5 In the model of Hashimoto et al (2020), although the financial market is imperfect and the presence of bubbles promotes capital accumulation, they cannot investigate how the extent of financial frictions affects unemployment when bubbles are present because agents cannot borrow in the financial market, unlike in the current paper. Introducing downward wage rigidity, Hanson and Phan (2017) and Biswas et al (2020) show that collapses of bubbles may cause a large and prolonged recession with involuntary unemployment.…”

ASSESSMENT OF ECONOMIC SECURITY IN THE REGIONAL LABOUR MARKET

“…На основе модели перекрывающихся поколений Хашимото К., Им Р., Куниеда Т. [9] выявили, что лопнувшие пузыри на финансовом рынке приводят к росту безработицы, несмотря на то, что наличие пузырей активов может способствовать накоплению капитала. Шуберт С.Ф., Турновский С.Я.…”