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Asset Bubbles, Endogenous Growth, and Financial Frictions

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  • Tomohiro Hirano

    (Faculty of Economics, The University of Tokyo)

  • Noriyuki Yanagawa

    (Faculty of Economics, The University of Tokyo)

Abstract

This paper analyzes the effects of bubbles in an infitely-lived agent model of endogenous growth with financial frictions and heterogeneous agents. We provide a complete characterization on the relationship between financial frictions and the existence of bubbles. Our model predicts that if the degree of pledgeability is sufficiently high or sufficiently low, bubbles can not exist. They can only arise at an intermediate degree. This suggests that improving the financial market condition might enhance the possibility of bubbles. We also examine whether bubbles are growth-enhancing or growth-impairing in the long run. We show that when the degree of pledgeability is relatively low, bubbles boost long-run growth. On the other hand, when it is relatively high, bubbles lower long-run growth. Moreover, we examine the effects of the burst of bubbles, and show that the effects much depend on the degree of the pldgeability, i.e., the quality of financial system.

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Bibliographic Info

Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-223.

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Length: 42 pages
Date of creation: Jul 2010
Date of revision: Sep 2010
Handle: RePEc:cfi:fseres:cf223

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