Briefing

The Roots of ‘Bubbly’ Recessions

Abstract: A downturn following the collapse of an asset bubble ? an episode of speculative booms in asset prices ? can be severe and sustained, with output and employment often lower than in the prebubble economy. This Economic Brief considers some possible theoretical explanations. It argues, based on insights from a simple economic model, that the interaction among financial frictions, wage rigidity, and the constraints of monetary policy near the zero lower bound is a key source of inefficiency in large bubbles. One potential remedy is to regulate speculative investment on bubbly assets so that individual investors internalize their investments' effects on systemic risk.

Keywords: recession; asset bubbles; bubbles;

Bibliographic Information

Provider: Federal Reserve Bank of Richmond

Part of Series: Richmond Fed Economic Brief

Publication Date: 2018

Issue: April