Bubbly Firm Dynamics and Aggregate Fluctuations

Haozhou Tang, Donghai Zhang   Published : August, 2022   JEL Code: E32, E44, E47   URL to this Article: https://doi.org/10.1016/j.jmoneco.2022.08.003

Abstract

The transmission channel of asset bubbles is studied in a heterogeneous firm model with endogenous entry and exit. We highlight the effects of asset bubbles along the extensive margin: the aggregate bubble can boost real economic activities by affecting firms' entry and exit decisions. Moreover, the model predicts the selection effect of bubbles: bubbly firms—firms with asset bubbles—are less productive than bubble-less firms. Finally, we provide empirical evidence that supports bubbles' effects along the extensive margin.

Keywords

Rational Bubbles; Extensive Margin; Firm Dynamics; Heterogeneous Firms