Two of the longest periods of economic weakness observed in the industrialized world during the twentieth century are often identified with the asset-price busts that preceded them: the Great Depression in the United States and the “lost decade” of the 1990s in Japan. In each case, rapidly falling asset prices, exacerbated by banking problems, marked the beginning of painfully long periods of economic malaise.
In part because of these two experiences, it is sometimes suggested that assetprice booms more generally lead to imbalances in the economy, and that asset-price busts and the correction of these imbalances lead to recessions that are longer, deeper, and associated with a greater fall in output and investment than other recessions. But what is the evidence on this question?