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The Macroeconomic Consequences of Asset Bubbles and Crashes

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

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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.

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