Asset Bubbles,Unemployment, and a Financial Crisis |
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| Institution: | 1. Graduate School of Economics, Kobe University, Rokko-dai 2-1, Kobe 657-8501, Japan;2. Institute of Economic Research, Kyoto University, Yoshida-honmachi, Sakyo-ku, Kyoto 606-8501, Japan;3. School of Economics, Kwansei Gakuin University, 1-155 Uegahara Ichiban-cho, Nishinomiya 662-8501, Hyogo, Japan;1. Washington University, St. Louis, USA;2. Federal Reserve Bank of St. Louis, USA;3. University of Milan, Department of Economics, Management, and Quantitative Methods, Italy;1. Institute of Economics, Academia Sinica, 128 Academia Road, Section 2, Taipei, Taiwan;2. Graduate School of Economics, Kobe University, 2-1 Rokodai-cho, Nada-ku, Kobe 657-8501, Japan;3. Institute of Economic Research, Kyoto University, Yoshida Honmachi, Sakyo-ku, Kyoto, 606-850 Japan;1. Banque de France and Larefi (University of Bordeaux), Contact information: Banque de France, 31 rue Croix des Petits Champs, 75049 Paris cedex, France;2. European Central Bank, Contact information: European Central Bank, Sonnemannstrasse 22, 60314 Frankfurt am Main, Germany |
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| Abstract: | A tractable growth model with asset bubbles is presented to demonstrate that a financial crisis caused by a bubble bursting increases unemployment rates. A bubbly asset, which is intrinsically useless, has a positive market value because purchasing the asset is a sole saving method for agents who draw insufficiently low productivity, whereas selling the asset is a fund-raising method for agents who draw high productivity to initiate an investment project. The presence of asset bubbles corrects allocative inefficiency regarding production resources, relocating investment resources from low-productivity agents to high-productivity agents. Accordingly, the presence of asset bubbles can promote capital accumulation. As capital accumulates and output increases, the number of vacant positions increases because firms acquire more funds to cover a search cost. As a result, firms are incentivized to increase employment. However, extrinsic uncertainty may burst asset bubbles and cause a self-fulfilling financial crisis, which is followed by increased unemployment. |
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