Stock Market Bubbles and Unemployment

46 Pages Posted: 10 Apr 2012  

Jianjun Miao

Boston University - Department of Economics

Pengfei Wang

HKUST, Department of Economics; Hong Kong University of Science & Technology (HKUST) - Department of Economics

Lifang Xu

Shanghai University of Finance and Economics

Date Written: April 8, 2012

Abstract

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

Suggested Citation

Miao, Jianjun and Wang, Pengfei and Xu, Lifang, Stock Market Bubbles and Unemployment (April 8, 2012). Available at SSRN: https://ssrn.com/abstract=2036594 or http://dx.doi.org/10.2139/ssrn.2036594

Jianjun Miao (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-6675 (Phone)

HOME PAGE: http://people.bu.edu/miaoj

Pengfei Wang

HKUST, Department of Economics ( email )

Clearwater Bay
Kowloon
Hong Kong

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China

Lifang Xu

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

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