حباب، انعطاف ناپذیری دستمزد، و رکود مداوم  Bubbles, wage rigidity, and persistent slumps

1 Intro The collapse of asset and credit bubbles often precedes financial crises and protracted recessions (Jordà et al., 2015), such as the “lost decades” following the collapse of Japan’s housing bubble in 1991. However, understanding post-bubble crises and recessions remains an open question for the general equilibrium bubble literature (see surveys by Barlevy, 2012 and Miao, 2014), as most existing models predict a relatively benign post-bubble transition. A standard prediction is that while bubbles give rise to economic booms, their collapse simply precedes a gradual reversion to the pre-bubble trend while the economy retains full employment (e.g., Hirano and Yanagawa, 2016). Our contribution is a tractable model where the collapse of bubbles can lead to a protracted slump, or even a “hysteresis” – periods in which investment, output, and employment are persistently below the prebubble trend. We embed downward wage rigidity (real or nominal, à-la Schmitt-Grohé and Uribe, 2016) into an otherwise relatively standard rational bubble model (à-la Martin and Ventura, 2012, 2016). Despite being a standard friction in New Keynesian models, wage rigidity has been largely absent from bubble models. We show its presence leads to drastically different post-bubble dynamics. As usual, bubbles in our model crowd in lending and investment. However, their collapse causes a slump in which wages cannot flexibly fall and firms have to cut employment, causing involuntary unemployment and a drop in net worth. This process amplifies and propagates the effects of collapse. Figure 1’s top panel illustrates the model’s dynamics (versus the standard dynamics with flexible wage). Our model allows for analytical characterizations of the depth and duration of the slump. While a higher rate of credit creation leads to bigger bubbles and economic booms, it also causes a deeper and longer recession after bubbles collapse. Additionally, we show that post-bubble inflation can reduce the depth and duration of the recession, but deflation would exacerbate them. Overall, by combining the rational-bubble and New Keynesian frameworks, our paper provides a new and complementary perspective on long recessions (see, inter alia, Krugman, 1998, Christiano et al., 2015).