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Economic Growth with Bubbles

  • Martin, Alberto
  • Ventura, Jaume

We develop a stylized model of economic growth with bubbles. In this model, financial frictions lead to equilibrium dispersion in the rates of return to investment. During bubbly episodes, relatively inefficient investors demand bubbles while relatively efficient investors supply them. Because of this, bubbly episodes channel resources towards efficient investment raising the growth rates of capital and output. The model also illustrates that the existence of bubbly episodes requires some investment to be dynamically inefficient: otherwise, there would be no demand for bubbles. This dynamic inefficiency, however, might be generated by an expansionary episode itself.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7770.

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Date of creation: Apr 2010
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Handle: RePEc:cpr:ceprdp:7770
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  1. Jaume Ventura, 2002. "Bubbles and capital flows," Economics Working Papers 846, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2010.
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  7. Aart Kraay & Jaume Ventura, 2007. "The Dot-Com Bubble, the Bush Deficits, and the U.S. Current Account," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 457-496 National Bureau of Economic Research, Inc.
  8. French, Kenneth R. & Poterba, James M., 1991. "Were Japanese stock prices too high?," Journal of Financial Economics, Elsevier, vol. 29(2), pages 337-363, October.
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  11. Ventura, Jaume, 2005. "A Global View of Economic Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 22, pages 1419-1497 Elsevier.
  12. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
  13. Alberto Martin & Jaume Ventura, 2010. "Theoretical Notes on Bubbles and the Current Crisis," Working Papers 519, Barcelona Graduate School of Economics.
  14. Guido Sandleris & Mark L. J. Wright, 2011. "The Costs of Financial Crises: Resource Misallocation, Productivity and Welfare in the 2001 Argentine Crisis," Business School Working Papers 2011-04, Universidad Torcuato Di Tella.
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  16. Thomas Chaney & David Sraer & David Thesmar, 2010. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment," NBER Working Papers 16060, National Bureau of Economic Research, Inc.
  17. Diba, Behzad T & Grossman, Herschel I, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 697-700, August.
  18. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  19. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  20. Saint-Paul, G., 1991. "Fiscal Policy In An Endogenous Growth Model," DELTA Working Papers 91-04, DELTA (Ecole normale supérieure).
  21. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
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  23. 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.
  24. Gan, Jie, 2007. "Collateral, debt capacity, and corporate investment: Evidence from a natural experiment," Journal of Financial Economics, Elsevier, vol. 85(3), pages 709-734, September.
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