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Asset Bubbles, Endogenous Growth, and Financial Frictions

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  • Tomohiro Hirano
  • Noriyuki Yanagawa

Abstract

This article analyses the existence and the effects of bubbles in an endogenous growth model with financial frictions and heterogeneous investments. Bubbles are likely to emerge when the degree of pledgeability is in the middle range, implying that improving the financial market might increase the potential for asset bubbles. Moreover, when the degree of pledgeability is relatively low, bubbles boost long-run growth; when it is relatively high, bubbles lower growth. Furthermore, we examine the effects of a bubble burst, and show that the effects depend on the degree of pledgeability, that is, the quality of the financial system. Finally, we conduct a full welfare analysis of asset bubbles.

Suggested Citation

  • Tomohiro Hirano & Noriyuki Yanagawa, 2017. "Asset Bubbles, Endogenous Growth, and Financial Frictions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(1), pages 406-443.
    • Handle: RePEc:oup:restud:v:84:y:2017:i:1:p:406-443.
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    File URL: http://hdl.handle.net/10.1093/restud/rdw059
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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