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Economic Brief

April 4, 2018

Richmond Fed Research Traces the Roots of ‘Bubbly’ Recessions

The Richmond Fed’s latest Economic Brief argues, through an economic model, that the interaction of three factors — financial frictions, wage rigidity and the constraints of monetary policy when interest rates are near zero — can cause recessions following the collapse of asset bubbles to be particularly severe and sustained.

According to the authors of the paper, one potential policy remedy is to regulate speculative investments in “bubbly” assets, for example, a tax on real estate speculation. Such a tax would drive demand downward for those assets and cause individual investors to internalize more of the risk that their investments create for the broader financial system and real economy. One key caveat, however, is the difficulty of identifying a bubble before it bursts.

The Richmond Fed’s Economic Brief series provides web-exclusive essays on current economic issues and trends. Sign up to receive an email notification when a new essay is posted.

As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District—including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia—to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.


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Jim Strader (804) 697-8956 (804) 332-0207 (mobile)
Laura Fortunato (804) 697-8196 (804) 698-0927 (mobile)