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Bubbles, Crashes, and Ups and Downs in Economic Growth: Theory and Evidence

Author

Listed:
  • Pablo A. Guerron-Quintana

    (Boston College)

  • Tomohiro Hirano

    (Royal Holloway, University of London
    Centre for Macroeconomics (CFM)
    Canon Institute for Global Studies)

  • Ryo Jinnai

    (Hitotsubashi University)

Abstract

We analyze the ups and downs in economic growth in recent decades by constructing a model with recurrent bubbles, crashes, and endogenous growth that can be easily taken to the data for structural estimation. Infinitely lived households expect future bubbles, which crowds out investment and reduces economic growth. For realized bubbles crowd in investment, their overall impact on economic growth and welfare crucially depends on both the level of financial development and the frequency of bubbles. We examine the US economic data through the lens of our model and identify bubbly episodes. Counterfactual simulations suggest that 1) the IT and housing bubbles not only caused economic booms but also lifted U.S. GDP by almost 2 percentage points permanently; and 2) the U.S. economy could have grown even faster in the long run if people had believed that asset bubbles would never arise.

Suggested Citation

  • Pablo A. Guerron-Quintana & Tomohiro Hirano & Ryo Jinnai, 2021. "Bubbles, Crashes, and Ups and Downs in Economic Growth: Theory and Evidence," Discussion Papers 2119, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2119
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    References listed on IDEAS

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