46 Pages Posted: 10 Apr 2012
Date Written: 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.
Keywords: stock market bubbles, unemployment, self-fulfilling beliefs, credit constraints, multiple equilibria, search and matching
JEL Classification: E24, E44, J64
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