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Following bubble asset crash, a great recession of economic activity took place and waves of job destruction were increasing. In this paper, a model with tax policy is presented to demonstrate that, asset bubbles decrease the unemployment level and increase the economic activity. We consider an OLG model with transfer, financed by tax burden on capital and labor income. Our results indicate that, the bubble promotes capital stock and reduces unemployment level if: The income and wealth redistribution is more in favor of young households and/or the tax rate on labor income is low, and the capital tax rate is high. Indeed, in the presence of bubble, a high level of tax burden on capital income, modifies significantly the relative price of capital, and this incites firms to favor the use of labor, due to the substitution effect. The income and wealth distribution effect and/or low labor income tax, allows the economy to sustain a higher capital stock.
