DP7770 Economic Growth with Bubbles
|Author(s):||Alberto Martín, Jaume Ventura|
|Publication Date:||April 2010|
|Keyword(s):||asset bubbles, dynamic inefficiency, economic growth, financial frictions, pyramid schemes|
|JEL(s):||E32, E44, O40|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=7770|
We develop a stylized model of economic growth with bubbles. In this model, financial frictions lead to equilibrium dispersion in the rates of return to investment. During bubbly episodes, relatively inefficient investors demand bubbles while relatively efficient investors supply them. Because of this, bubbly episodes channel resources towards efficient investment raising the growth rates of capital and output. The model also illustrates that the existence of bubbly episodes requires some investment to be dynamically inefficient: otherwise, there would be no demand for bubbles. This dynamic inefficiency, however, might be generated by an expansionary episode itself.