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Intangible Capital, Relative Asset Shortages and Bubbles

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  • Stefano Giglio
  • Tiago Severo

Abstract

We analyze an overlapping generations economy with financial frictions and accumulation of both physical and intangible capital. The key difference between them is that intangible capital cannot be used as collateral for borrowing. As intangibles become more important in production, financial frictions tighten and equilibrium interest rates decline, creating the conditions for the emergence of rational bubbles. We also analyze the question of dynamic efficiency, demonstrating that, in the presence of financial frictions, neither the interest rate test nor the test proposed by Abel et al. (1989) are appropriate. Finally we show that, in general, rational bubbles are not Pareto improving in our framework.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 786969000000000121.

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Date of creation: 22 May 2011
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Handle: RePEc:cla:levarc:786969000000000121

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Cited by:
  1. Guillaume Rocheteau & Jose Antonio Rodriguez-Lopez, 2013. "Liquidity Provision, Interest Rates, and Unemployment," Working Papers 121311, University of California-Irvine, Department of Economics.
  2. Chen, kaiji & Wen, Yi, 2014. "The great housing boom of China," Working Papers, Federal Reserve Bank of St. Louis 2014-22, Federal Reserve Bank of St. Louis.
  3. Dietrich, Diemo & Hauck, Achim, 2014. "Bank capital regulation, loan contracts, and corporate investment," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 54(2), pages 230-241.

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