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Asset Bubbles and Endogenous Growth

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  • Noriyuki Yanagawa
  • Gene M. Grossman

Abstract

We study the interaction between productive and nonproductive savings in an economy that grows in the long run due to endogenous improvements in labor productivity. As in the neoclassical growth setting with overlapping generations studied by Tirole (1985), asset bubbles can exist in an economy with endogenous growth provided they are not too large and that the growth rate in the equilibrium without bubbles exceeds the interest rate. Since the growth rate in the bubble-less equilibrium is endogenous, the existence condition reflects parameters of tastes and technology. We find that bubbles, when they exist, retard the growth of the economy, perhaps even in the long run, and reduce the welfare of all generations born after the bubble appears.

Suggested Citation

  • Noriyuki Yanagawa & Gene M. Grossman, 1992. "Asset Bubbles and Endogenous Growth," NBER Working Papers 4004, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4004 Note: EFG
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    3. O'Connell, Stephen A & Zeldes, Stephen P, 1988. "Rational Ponzi Games," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 431-450, August.
    4. Alogoskoufis, G.S. & van der Ploeg, F., 1990. "Endogenous growth and overlapping generations," Discussion Paper 1990-72, Tilburg University, Center for Economic Research.
    5. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    6. Kenneth J. Arrow, 1962. "The Economic Implications of Learning by Doing," Review of Economic Studies, Oxford University Press, vol. 29(3), pages 155-173.
    7. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
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