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Economic Growth with Bubbles

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  • Jaume Ventura
  • Alberto Martin

Abstract

We develop a stylized model of economic growth with bubbles. In this model, financial frictions lead to equilibriumdispersion in the rates of return to investment. During bubbly episodes, unproductive investors demand bubbles while productive investors supply them. Because of this, bubbly episodes channel resources towards productive 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 ineficiency, however, might be generated by an expansionary episode itself.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 445.

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Date of creation: Mar 2010
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Handle: RePEc:bge:wpaper:445

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Keywords: Bubbles; dynamic inefficiency; economic growth; financial frictions; pyramid schemes;

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  20. Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers 14-88, Wharton School Rodney L. White Center for Financial Research.
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