Bubbly firm dynamics and aggregate fluctuations

•Bubbles affect the economy along the extensive margin.•Bubbles boost real economic activities by affecting firms’ entry and exit decisions.•Bubbly firms—firms with asset bubbles—are less productive than bubble-less firms.•Bubble shocks are identified to maximize the FEVD of the non-fundamental comp...

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Bibliographic Details
Published in:Journal of monetary economics 2022-11, Vol.132, p.64-80
Main Authors: Tang, Haozhou, Zhang, Donghai
Format: Article
Language:English
Subjects:
Extensive margin
Firm dynamics
Heterogeneous firms
Rational bubbles
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Summary:•Bubbles affect the economy along the extensive margin.•Bubbles boost real economic activities by affecting firms’ entry and exit decisions.•Bubbly firms—firms with asset bubbles—are less productive than bubble-less firms.•Bubble shocks are identified to maximize the FEVD of the non-fundamental component.•Empirical evidence supports bubbles’ effects along the extensive margin. The transmission channel of asset bubbles is studied in a heterogeneous firm model with endogenous entry and exit. We highlight the effects of asset bubbles along the extensive margin: the aggregate bubble can boost real economic activities by affecting firms’ entry and exit decisions. Moreover, the model predicts the selection effect of bubbles: bubbly firms—firms with asset bubbles—are less productive than bubble-less firms. Finally, we provide empirical evidence that supports bubbles’ effects along the extensive margin.
ISSN:0304-3932
1873-1295
DOI:10.1016/j.jmoneco.2022.08.003