Bubbles and Stagnation.

This article examines the role of asset bubbles in economies vulnerable to persistent stagnation, characterized by a shortage of assets, excess savings, and a zero lower bound (ZLB) on nominal interest rates that constrain monetary policy. It develops a formal overlapping-generations model incorporating safe and risky bubbles—assets with no fundamental value but traded for expected resale—and shows that safe bubbles can expand the supply of assets, raise the natural interest rate, and prevent output from falling below potential, thereby improving welfare in stagnation environments with nominal wage rigidities. Risky bubbles, which may collapse with positive probability, are smaller and less effective at avoiding stagnation, but fiscal policies such as government debt issuance tend to crowd out bubbles, while bailout transfers contingent on bubble collapse can make bubbles effectively safer and larger. The paper thus provides a theoretical framework linking asset bubbles, secular stagnation, and fiscal policy, highlighting that sufficiently safe bubbles can sustain aggregate demand and employment when conventional monetary policy is constrained by the ZLB.