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Speculative Growth

  • Ricardo J. Caballero
  • Mohamad L. Hammour

We propose a framework for understanding recurrent historical episodes of vigorous economic expansion accompanied by extreme asset valuations, as exhibited by Japan in the 1980's and the U.S. in the 1990's. We interpret this phenomenon as a high-valuation equilibrium with a low effective cost of capital based on optimism about the future availability of funds for investment. The key to the sustainability of such equilibrium is feedback from increased growth to an increase in the supply of funding. We show that such feedback arises naturally when the expansion is concentrated in a new economy' sector and when it is supported by sustained financial surpluses-both of which would constitute an integral part, as cause and consequence, of a speculative growth' equilibrium. The high-valuation equilibrium we analyze may take the form of a stock market bubble. In contrast to classic bubbles on non-productive assets, the bubbles in our model encourage real investments, boost long run savings, and may appear in dynamically efficient economies.

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File URL: http://www.nber.org/papers/w9381.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9381.

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Date of creation: Dec 2002
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Publication status: published as Caballero, Ricardo J., E. Farhi and M. Hammour. “Speculative Growth: Hints from the US Economy." American Economic Review 96, 4 (September 2006): 1159-1192.
Handle: RePEc:nbr:nberwo:9381
Note: EFG
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  1. Christopher D. Carroll & David N. Weil, 1993. "Saving and growth: a reinterpretation," Working Paper Series / Economic Activity Section 140, Board of Governors of the Federal Reserve System (U.S.).
  2. Philippe Weil, 1989. "On The Possibility of Price Decreasing Bubbles," NBER Working Papers 2821, National Bureau of Economic Research, Inc.
  3. Olivier, Jacques, 2000. "Growth-Enhancing Bubbles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 133-51, February.
  4. Bart Hobijn & Boyan Jovanovic, 2001. "The Information-Technology Revolution and the Stock Market: Evidence," American Economic Review, American Economic Association, vol. 91(5), pages 1203-1220, December.
  5. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  6. Saint-Paul, Gilles, 1992. "Fiscal Policy in an Endogenous Growth Model," The Quarterly Journal of Economics, MIT Press, vol. 107(4), pages 1243-59, November.
  7. Grossman, Gene M. & Yanagawa, Noriyuki, 1993. "Asset bubbles and endogenous growth," Journal of Monetary Economics, Elsevier, vol. 31(1), pages 3-19, February.
  8. Philippe Weil, 1990. "On the Possibility of Price Decreasing Bubbles," Sciences Po publications info:hdl:2441/8701, Sciences Po.
  9. Michael Gavin & Ricardo Hausmann & Ernesto Talvi, 1997. "Saving Behavior in Latin America: Overview and Policy Issues," IDB Publications (Working Papers) 6427, Inter-American Development Bank.
  10. Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc.
  11. King, Ian & Ferguson, Don, 1993. "Dynamic inefficiency, endogenous growth, and Ponzi games," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 79-104, August.
  12. Boyan Jovanovic & Jeremy Greenwood, 1999. "The Information-Technology Revolution and the Stock Market," American Economic Review, American Economic Association, vol. 89(2), pages 116-122, May.
  13. Guido Cozzi, 1998. "Culture as a Bubble," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 376-394, April.
  14. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
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