Stock market bubbles and unemployment

Abstract

This paper incorporates endogenous credit constraints in a search model of unemployment. These constraints generate multiple equilibria supported by self-fulfilling beliefs. A stock market bubble exists through a positive feedback loop mechanism. The collapse of the bubble tightens the credit constraints, causing firms to reduce investment and hirings. Unemployed workers are hard to find jobs generating high and persistent unemployment. A recession is caused by shifts in beliefs, even though there is no exogenous shock to the fundamentals. JEL Classification: E24, E44, J64

Asset bubbles, labour market frictions and R&D‐based growth

“…As for the relationship between asset bubbles and unemployment, Kocherlakota (2011) and Miao et al (2016) present studies similar to our own. Although Kocherlakota (2011) investigates the impact of asset bubbles on unemployment, he does not consider capital accumulation.…”

“…Therefore, it is not possible to examine economic growth in Kocherlakota's model. Miao et al (2016) investigate the relationship between unemployment and asset bubbles in an economy with labour and capital market frictions but do not treat economic growth endogenously. Hashimoto and Im (2016) provide a study closely related to ours.…”

Land Prices and Unemployment

“…Examples are Gertler et al (2008), Gertler and Trigari (2009), Lubik (2009), Blanchard and Galí (2010, Justiniano and Michelacci (2011), Christiano et al (2011), Galí et al (2012, and Christiano et al (2013). Recent studies on potential links between financial factors and unemployment fluctuations include Davis et al (2010), Hall (2011b), Monacelli et al (2011), Petrosky-Nadeau and Wasmer (2013), Petrosky-Nadeau (2014), and Miao et al (2015).…”

Bubbles and unemployment in an endogenous growth model

“…As Santos and Woodford (1997) point out, it is hard to generate rational bubbles in an infinitely lived agent model without market frictions. For an alternative approach that focuses on the friction in the financial market seeHirano and Yanagawa (2010) andMartin and Ventura (2012); these authors examine the existence of bubbles and show that they can be growth enhancing or growth impairing depending on the restrictiveness of the collateral constraint.4 Miao et al (2012) andKocherlakota (2011) present studies that are similar to our own Miao et al (2012). investigate the relationship between unemployment and stock market bubbles in an economy with labor market friction and financial market friction Kocherlakota (2011).…”