Asset Bubbles and Global Imbalances
What caused the housing boom and bust of the early 2000s? Capital inflows from emerging markets to developed economies can contribute to the formation of bubbles in asset prices. Those bubbles encourage the accumulation of debt, and the deleveraging of that debt exacerbates the decline in economic activity when the bubble bursts.
We develop a tractable rational bubbles model with financial frictions, downward nominal wage rigidity, and the zero lower bound. The interaction of financial frictions and nominal rigidities leads to a "bubbly pecuniary externality," where competitive speculation in risky bubbly assets can result in excessive investment booms that precede inefficient busts. The collapse of a large bubble can push the economy into a "secular stagnation" equilibrium, where the zero lower bound and the nominal wage rigidity constraint bind, leading to a persistent and inefficient recession. We evaluate a ...
Regressive Welfare Effects of Housing Bubbles
We analyze the welfare effects of asset bubbles in a model with income inequality and financial friction. We show that a bubble that emerges in the value of housing, a durable asset that is fundamentally useful for everyone, has regressive welfare effects. By raising the housing price, the bubble benefits high-income savers but negatively affects low-income borrowers. The key intuition is that, by creating a bubble in the market price, savers' demand for the housing asset for investment purposes imposes a negative externality on borrowers, who only demand the housing asset for utility ...
The Roots of ‘Bubbly’ Recessions
A downturn following the collapse of an asset bubble ? an episode of speculative booms in asset prices ? can be severe and sustained, with output and employment often lower than in the prebubble economy. This Economic Brief considers some possible theoretical explanations. It argues, based on insights from a simple economic model, that the interaction among financial frictions, wage rigidity, and the constraints of monetary policy near the zero lower bound is a key source of inefficiency in large bubbles. One potential remedy is to regulate speculative investment on bubbly assets so that ...
Extreme Weather and the Macroeconomy
The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico
Puerto Rico's unique characteristics as a U.S. territory allow us to examine the channels through which (sub)sovereign default risk can have real effects on the macroeconomy. Post-2012, during the period of increased default probabilities, the cointegrating relationship between real activity in Puerto Rico and the U.S. mainland breaks down and Puerto Rico spirals into a significant decline. We exploit the cross-industry variation in default risk exposure to identify the impact of changes in default risk on employment. The evidence suggests that there are significantly higher employment growth ...
Temperature and Growth: A Panel Analysis of the United States
We document that seasonal temperatures have significant and systematic effects on the U.S. economy, both at the aggregate level and across a wide cross-section of economic sectors. This effect is particularly strong for the summer: a 1 degree F increase in the average summer temperature is associated with a reduction in the annual growth rate of state-level output of 0.15 to 0.25 percentage points. We combine our estimates with projected increases in seasonal temperatures and find that rising temperatures could reduce U.S. economic growth by up to one-third over the next century.
Asset Bubbles and Global Imbalances
We analyze the relationships between bubbles, capital flows, and economic activities in a rational bubble model with two large open economies. We establish a reinforcing relationship between global imbalances and bubbles. Capital flows from South to North facilitate the emergence and the size of bubbles in the North. Bubbles in the North in turn facilitate South-to-North capital flows. The model can simultaneously explain several stylized features of recent bubble episodes.
Time-Varying Skewness and Real Business Cycles
In the context of a quantitative real business cycle (RBC) model, we document that shocks to the higher-order moments, especially the skewness, of productivity can have large first-order effects on business cycles. We augment a standard small open economy RBC model with a new feature: a discrete regime switching between higher-order moments of total factor productivity shocks between an unrest state and a quiet state. To map the theory to data, we exploit an extensive database of mass political unrest around the world. We calibrate the model to the observed increases in the volatility and ...
Debt Limits and Credit Bubbles in General Equilibrium
We provide a novel characterization of self-enforcing debt limits in a general equilibrium framework of risk sharing with limited commitment, where defaulters are subject to recourse (a fractional loss of current and future endowments) and exclusion from future credit. We show that debt limits are exactly equal to the present value of recourse plus a credit bubble component. We provide applications to models of sovereign debt, private collateralized debt, and domestic public debt. Implications include an original equivalence mapping among distinct institutional arrangements, thereby ...