The Macroeconomic Consequences of Asset Bubbles and Crashes

Shi, Lisi and Suen, Richard M. H. (2018): The Macroeconomic Consequences of Asset Bubbles and Crashes.

Abstract

This paper analyzes the macroeconomic implications of asset price bubbles and crashes using an overlapping-generation model with endogenous labor supply. This model highlights the effects of asset price fluctuations on individuals' labor supply decision, and shows how these fluctuations can propagate to the aggregate economy through the labor-market channel. We show that asset bubbles can potentially crowd in productive investment and promote employment. This is more likely to happen when both the elasticity of intertemporal substitution for consumption and the Frisch elasticity of labor supply are large.

• Item Type: MPRA Paper
• Language: English
• Keywords: Asset Bubbles, Overlapping Generations, Endogenous Labor
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy

References

Andersen, Torben M. and Joydeep Bhattacharya (2013) Unfunded pensions and endogenous labor supply. Macroeconomic Dynamics 17, 971-997.

Caballero, Ricardo J. and Arvind Krishnamurthy (2006) Bubbles and capital flow volatility: causes and risk management. Journal of Economic Theory 53, 35-53.

Chirinko, Robert S. and Huntley Schaller (2001) Business fixed investment and "bubbles": the Japanese case. American Economic Review 91, 663-680.

Chirinko, Robert S. and Huntley Schaller (2011) Fundamentals, misvaluation, and business investment. Journal of Money, Credit and Banking 43, 1423-1442.

Farhi, Emmanuel and Jean Tirole (2012) Bubbly liquidity. Review of Economic Studies 79, 678-706.

Fuster, Luisa (1999) Effects of uncertain lifetime and annuity insurance on capital accumulation and growth. Economic Theory 13, 429-445.

Galor, Oded and Harl E. Ryder (1989) Existence, uniqueness and stability of equilibrium in an overlapping-generations model with productive capital. Journal of Economic Theory 49, 360-375.

Gan, Jie (2007) The real effects of asset market bubbles: loan- and firm-level evidence of a lending channel. Review of Financial Studies 20, 1941-1973.

LeRoy, Stephen F. (2004) Rational exuberance.Journal of Economic Literature 42, 783-804.

Martin, Alberto and Jaume Ventura (2012) Economic growth with bubbles. American Economic Review 102, 3033-3058.

Miao, Jianjun (2014) Introduction to economic theory of bubbles. Journal of Mathematical Economics 53, 130-136.

Ofek, Eli and Matthew Richardson (2002) The valuation and market rationality of internet stock prices. Oxford Review of Economic Policy 18, 265-287.

Olivier, Jacques (2000) Growth-enhancing bubbles. International Economic Review 41, 133-151.

Shi, Lisi and Richard M.H. Suen (2014) Asset bubbles in an overlapping generations model with endogenous labor supply. Economics Letters 123, 164-167.

Shiller, Robert J. (2007) Understanding recent trends in house prices and home ownership. NBER working paper 13553.

Tirole, Jean (1985) Asset bubbles and overlapping generations. Econometrica 53, 1499-1528.

Ventura, Jaume (2012) Bubbles and capital flows. Journal of Economic Theory 147, 738-758.

Weil, Philippe (1987) Confidence and the real value of money in an overlapping generations economy. Quarterly Journal of Economics 102, 1-22.