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Leverage, Endogenous Unbalanced Growth, and Asset Price Bubbles

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  • Tomohiro Hirano
  • Ryo Jinnai
  • Alexis Akira Toda

Abstract

We present a general equilibrium macro-finance model with a positive feedback loop between capital investment and land price. As leverage is relaxed beyond a critical value, through the financial accelerator, a phase transition occurs from balanced growth where land prices reflect fundamentals (present value of rents) to unbalanced growth where land prices grow faster than rents, generating land price bubbles. Unbalanced growth dynamics and bubbles are associated with financial loosening and technological progress. In an analytically tractable two-sector large open economy model with unique equilibria, financial loosening simultaneously leads to low interest rates, asset overvaluation, and top-end wealth concentration.

Suggested Citation

  • Tomohiro Hirano & Ryo Jinnai & Alexis Akira Toda, 2022. "Leverage, Endogenous Unbalanced Growth, and Asset Price Bubbles," Papers 2211.13100, arXiv.org, revised Feb 2024.
    • Handle: RePEc:arx:papers:2211.13100
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    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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