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Economic Growth with Bubbles

Author

Listed:
  • Alberto Martin
  • Jaume Ventura

Abstract

We develop a stylized model of economic growth with bubbles in which changes in investor sentiment lead to the appearance and collapse of macroeconomic bubbles or pyramid schemes. These bubbles mitigate the effects of financial frictions. During bubbly episodes, unproductive investors demand bubbles while productive investors supply them. These transfers of resources improve economic efficiency thereby expanding consumption, the capital stock and output. When bubbly episodes end, there is a fall in consumption, the capital stock and output. We argue that the stochastic equilibria of the model provide a natural way of introducing bubble shocks into business cycle models. (JEL E22, E23, E32, E44, O41)

Suggested Citation

  • Alberto Martin & Jaume Ventura, 2012. "Economic Growth with Bubbles," American Economic Review, American Economic Association, vol. 102(6), pages 3033-3058, October.
    • Handle: RePEc:aea:aecrev:v:102:y:2012:i:6:p:3033-58
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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