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Asset Bubbles, Endogenous Growth, and Financial Frictions

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Listed:
  • Tomohiro Hirano

    (Financial Research and Training Center, Financial Services Agency, The Japanese Government)

  • Noriyuki Yanagawa

    (Faculty of Economics, University of Tokyo)

Abstract

This paper analyzes the effects of bubbles in an in.nitely-lived agent model of endogenous growth with .nancial frictions and heterogeneous agents. We provide a complete characterization on the relationship between .nancial 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.

Suggested Citation

  • Tomohiro Hirano & Noriyuki Yanagawa, 2010. "Asset Bubbles, Endogenous Growth, and Financial Frictions," CIRJE F-Series CIRJE-F-752, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2010cf752
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    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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