In this paper, I elaborate on three strategies that governments can implement when faced with emotion-driven policy bubbles: the wait-and-see approach, the emotional containment approach, and the bubble-pricking approach. Based on the limited but important literature on this phenomenon and on...

We propose a framework for understanding recurrent historical episodes of vigorous economic expansion accompanied by extreme asset valuations, as exhibited by the U.S. in the 1990s. We interpret this phenomenon as a high-valuation equilibrium with a low effective cost of capital based on...

We study supply and demand shocks in a general disaggregated model with multiple sectors, factors, and input-output linkages, as well as downward nominal wage rigidities and a zero lower bound constraint. We use the model to understand how the COVID-19 crisis, an omnibus of supply and demand...

This paper examines how financial frictions and policy uncertainty jointly influence firms' investments in pollution abatement. Our data analyses suggest that financially constrained firms are less likely to invest in pollution abatement and are more likely to release toxic pollutants, with this...

This paper introduces a dynamic general equilibrium model to study how the distribution of leverage and foreclosure affect house prices.The model shows how foreclosure sales, through their effect on housing supply, amplify and propagate house price drops. A calibration shows consumption and...

In this study I examine the welfare implications of monetary policy by constructing a novel New Keynesian model that properly accounts for asset pricing facts. I find that the Ramsey optimal monetary policy yields an inflation rate above 3.5% and inflation volatility close to 1.5%. The same...

We embed downward wage rigidity into a rational bubble model. We analytically characterize how the collapse of bubbles can interact with wage rigidity to generate deep and protracted recessions with involuntary unemployment, such as those in Japan or Spain

Developed economies have experienced slower growth since the 2008 Önancial crisis, creating fears of "secular stagnation." Rational expectations models have forward-looking bubble solutions, which could cause this; here we investigate the case of Japan. We show that a New Keynesian model with a...

An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond...

It is widely agreed that the Nasdaq during the dot-com era 20 years ago was a full-fledged stock market bubble. Recently, the US stock market according to many metrics has become significantly more speculative and overvalued than it was at the dot-com peak 20 years ago. In both instances, a very...