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Leverage, Endogenous Unbalanced Growth, and Asset Price Bubbles

Author

Listed:
  • Tomohiro Hirano
  • Ryo Jinnai
  • Alexis Akira Toda

Abstract

We present a new theoretical framework to think about asset price bubbles in dividend-paying assets. We study a general equilibrium microfinance model with a positive feedback loop between capital investment and land price, whose magnitude is affected by financial leverage. As leverage is relaxed beyond a critical value, a phase transition occurs from balanced growth of a stationary nature where land prices reflect fundamentals (present value of rents) to unbalanced growth of a nonstationary nature where land prices grow faster than rents, generating a land price bubble. Unbalanced growth dynamics and bubbles are associated with financial deregulation and technological progress. Keywords : land bubble, leverage, nonstationarity, phase transition, unbalanced growth. JEL codes : D52, D53, E44, G12.

Suggested Citation

  • Tomohiro Hirano & Ryo Jinnai & Alexis Akira Toda, 2023. "Leverage, Endogenous Unbalanced Growth, and Asset Price Bubbles," CIGS Working Paper Series 23-015E, The Canon Institute for Global Studies.
    • Handle: RePEc:cnn:wpaper:23-015e
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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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