Bubbles, wage rigidity, and persistent slumps

- Highlight the interaction between the collapse of rational bubbles and downward wage rigidity.
- Analytically characterize depth and duration of post-bubble recessions.
- Higher credit growth during bubble episodes leads to deeper and longer recessions.

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.