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Asset bubbles and endogenous growth

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Author Info

  • Grossman, Gene M.
  • Yanagawa, Noriyuki

Abstract

We study the interaction between productive and nonproductive savings in an economy that grows in the long run due to endogenous improvements in labor productivity. As in the neoclassical growth setting with overlapping generations studied by Tirole (1985), asset bubbles can exist in an economy with endogenous growth provided they are not too large and that the growth rate in the equilibrium without bubbles exceeds the interest rate. Since the growth rate in the bubble-less equilibrium is endogenous, the existence condition reflects parameters of tastes and technology. We find that bubbles, when they exist, retard the growth of the economy, perhaps even in the long run, and reduce the welfare of all generations born after the bubble appears.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 31 (1993)
Issue (Month): 1 (February)
Pages: 3-19

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Handle: RePEc:eee:moneco:v:31:y:1993:i:1:p:3-19

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  2. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  3. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  4. Sergio T. Rebelo, 1992. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  5. Alogoskoufis, G.S. & Ploeg, F. van der, 1990. "Endogenous growth and overlapping generations," Discussion Paper 1990-72, Tilburg University, Center for Economic Research.
  6. Stephen A. O'Connell & Stephen P. Zeldes, . "Rational Ponzi Games," Rodney L. White Center for Financial Research Working Papers 18-86, Wharton School Rodney L. White Center for Financial Research.
    • O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-50, August.
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