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Asset Bubbles, Endogenous Growth, and Financial Frictions

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  • 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.

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Bibliographic Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-752.

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Length: 38pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:tky:fseres:2010cf752

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  1. Kunieda, Takuma, 2008. "Financial Development and Volatility of Growth Rates: New Evidence," MPRA Paper 11341, University Library of Munich, Germany.
  2. Ricardo J. Caballero & Arvind Krishnamurthy, 2005. "Bubbles and Capital Flow Volatility: Causes and Risk Management," NBER Working Papers 11618, National Bureau of Economic Research, Inc.
  3. Kosuke Aoki & Kalin Nikolov, 2011. "Bubbles, Banks, and Financial Stability," IMES Discussion Paper Series 11-E-24, Institute for Monetary and Economic Studies, Bank of Japan.
  4. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
  5. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
  6. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
  7. Nobuhiro Kiyotaki, 1998. "Credit and Business Cycles," The Japanese Economic Review, Japanese Economic Association, vol. 49(1), pages 18-35, 03.
  8. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
  9. Grossman, G.M. & Yanagawa, N., 1992. "Asset Bubbles and Endogenous Growth," Papers 160, Princeton, Woodrow Wilson School - Public and International Affairs.
  10. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  11. Boris Pleskovic & Joseph E. Stiglitz, 2000. "Annual World Bank Conference on Development Economics 1999," World Bank Publications, The World Bank, number 13839.
  12. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  13. anonymous, 1998. "Credit unions: What's the fuss?," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 4.
  14. George A. Akerlof, 2009. "How Human Psychology Drives the Economy and Why It Matters," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 91(5), pages 1175-1175.
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Cited by:
  1. Hirano, Tomohiro & Inaba, Masaru, 2010. "Asset Price Bubbles in the Kiyotaki-Moore Model," MPRA Paper 36632, University Library of Munich, Germany.
  2. Zhiwei Xu & Pengfei Wang & Jianjun Miao, 2013. "A Bayesian DSGE Model of Stock Market Bubbles and Business Cycles," 2013 Meeting Papers 167, Society for Economic Dynamics.
  3. Pengfei Wang & Jianjun Miao, 2011. "Bubbles and Credit Constraints," 2011 Meeting Papers 94, Society for Economic Dynamics.
  4. Jianjun Miao & PENGFEI WANG, 2011. "Sectoral Bubbles and Endogenous Growth," Boston University - Department of Economics - Working Papers Series WP2011-032, Boston University - Department of Economics.
  5. Daisuke Ikeda & Toan Phan, 2013. "Asset Bubbles & Global Imbalances," Working Papers 2013-041, Department of Research, Ipag Business School.

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