Stock Market Bubbles and Unemployment
Boston University - Department of Economics
Hong Kong University of Science & Technology (HKUST)
Shanghai University of Finance and Economics
April 8, 2012
This paper introduces 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.
Number of Pages in PDF File: 46
Keywords: stock market bubbles, unemployment, self-fulfilling beliefs, credit constraints, multiple equilibria, search and matching
JEL Classification: E24, E44, J64
Date posted: April 10, 2012
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