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Asset Bubbles, Endogenous Growth, and Financial Frictions

  • Tomohiro Hirano

    (Faculty of Economics, The University of Tokyo)

  • Noriyuki Yanagawa

    (Faculty of Economics, The University of Tokyo)

This paper analyzes the effects of bubbles in an infitely-lived agent model of endogenous growth with financial frictions and heterogeneous agents. We provide a complete characterization on the relationship between financial 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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Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-223.

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Length: 42 pages
Date of creation: Jul 2010
Date of revision: Sep 2010
Handle: RePEc:cfi:fseres:cf223
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  1. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
  2. 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.
  3. 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.
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  5. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 3-19, February.
  6. Kosuke Aoki & Kalin Nikolov, 2011. "Bubbles, Banks, and Financial Stability," CARF F-Series CARF-F-253, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  7. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
  8. 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.
  9. Guido Lorenzoni, 2008. "Inefficient Credit Booms," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 809-833.
  10. anonymous, 1998. "Credit unions: What's the fuss?," Financial Update, Federal Reserve Bank of Atlanta, issue Oct, pages 4.
  11. 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.
  12. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
  13. Kunieda, Takuma, 2008. "Financial Development and Volatility of Growth Rates: New Evidence," MPRA Paper 11341, University Library of Munich, Germany.
  14. Boris Pleskovic & Joseph E. Stiglitz, 2000. "Annual World Bank Conference on Development Economics 1999," World Bank Publications, The World Bank, number 13839.
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