Bubbles, wage rigidity, and persistent slumps

We embed downward wage rigidity into a rational bubble model. We analytically characterize how the collapse of bubbles can interact with wage rigidity to generate deep and protracted recessions with involuntary unemployment, such as those in Japan or Spain. •Highlight the interaction between the col...

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Bibliographic Details
Published in:Economics letters 2017-02, Vol.151, p.66-70
Main Authors: Hanson, Andrew, Phan, Toan
Format: Article
Language:English
Subjects:
Equilibrium
Japan
Long recession
Rational bubbles
Rationality
Recessions
Spain
Studies
Unemployment
Wage rigidity
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Summary:We embed downward wage rigidity into a rational bubble model. We analytically characterize how the collapse of bubbles can interact with wage rigidity to generate deep and protracted recessions with involuntary unemployment, such as those in Japan or Spain. •Highlight the interaction between the collapse of rational bubbles and downward wage rigidity.•Analytically characterize depth and duration of post-bubble recessions.•Higher credit growth during bubble episodes leads to deeper and longer recessions.
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2016.12.018