Bubbly Firm Dynamics and Aggregate Fluctuations

66 Pages Posted: 13 Apr 2021

See all articles by Haozhou Tang

Haozhou Tang

Bank of Mexico

Donghai Zhang

Institute for Macroeconomics and Econometrics - University of Bonn

Date Written: April 13, 2021

Abstract

This study generalizes a standard heterogeneous firm model with endogenous entry and exit by allowing for asset bubbles. We highlight the selection effect of bubbles that incentivizes low-productivity firms to enter or remain in the market. We show that a rise in the aggregate bubble can boost real economic activities by increasing the number of entrants and decreasing the number of exits. Using firm-level data, we find that an overvalued firm is less likely to exit the market, which supports the novel transmission channel of bubbles. Moreover, we show that the model-implied impulse responses are consistent with those identified in the data. Finally, we demonstrate that a model without bubbles fails to reproduce our empirical findings.

Keywords: Rational Bubbles, Firm Dynamics, Heterogeneous Firms

JEL Classification: E32, E44, E47

Suggested Citation

Tang, Haozhou and Zhang, Donghai, Bubbly Firm Dynamics and Aggregate Fluctuations (April 13, 2021). Available at SSRN: https://ssrn.com/abstract=3825479 or http://dx.doi.org/10.2139/ssrn.3825479

Haozhou Tang

Bank of Mexico ( email )

Av. 5 de Mayo 18
Piso 4
Mexico City, 06059
Mexico

Donghai Zhang (Contact Author)

Institute for Macroeconomics and Econometrics - University of Bonn ( email )

Bonn
Germany

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