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Federal Reserve Bank of Richmond
Richmond Fed Economic Brief
The Roots of ‘Bubbly’ Recessions
Helen Fessenden
Toan Phan
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.


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Helen Fessenden & Toan Phan, "The Roots of ‘Bubbly’ Recessions" , Federal Reserve Bank of Richmond, Richmond Fed Economic Brief, issue April, pages 1-6, 2018.
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Keywords: recession; asset bubble; bubbles
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