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Intangible Capital, Relative Asset Shortages and Bubbles

  • Stefano Giglio
  • Tiago Severo

We analyze an overlapping generations economy with financial frictions and accumulation of both physical and intangible capital. The key difference between them is that intangible capital cannot be used as collateral for borrowing. As intangibles become more important in production, financial frictions tighten and equilibrium interest rates decline, creating the conditions for the emergence of rational bubbles. We also analyze the question of dynamic efficiency, demonstrating that, in the presence of financial frictions, neither the interest rate test nor the test proposed by Abel et al. (1989) are appropriate. Finally we show that, in general, rational bubbles are not Pareto improving in our framework.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/271.

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Length: 38
Date of creation: 01 Nov 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/271
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