Ellingsen will present in person in the IIES Seminar Room, you can also click here to join the zoom.

Bubbles and Kinks:A Monetary Model of Recessions, with David Domeij.

When the interest rate on nominal public debt is below the economy’s growth rate, public debt is a bubble whose value may be subject to sunspot fluctuations.

In our model of the goods market, search frictions create kinked demand functions, wherefore nominal goods prices become downwardly rigid despite being freely adjustable.

Thus, when bubbles migrate from private assets to public debt, the increase in money
demand creates excess supply of goods along the inflation-anchored rational expectations equilibrium path.

A permanent public debt expansion avoids such a recession.

Excessively large temporary interest rate reductions tend to delay the recession rather than averting it.