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Asset Bubbles, Endogenous Growth, and Financial Frictions

  • Hirano, Tomohiro
  • Yanagawa, Noriyuki
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    This paper analyzes the effects of bubbles in an infinitely-lived agent model of endogenous growth with financial frictions and heterogeneous agents. We provide a complete characterization on the relationship between financial frictions and the existence of bubbles. Our model predicts that if the degree of pledgeability is sufficiently high or sufficiently low, bubbles can not exist. They can only arise at an intermediate degree. This suggests that improving the financial market condition might enhance the possibility of bubbles. We also examine whether bubbles are growth-enhancing or growth-impairing in the long run. We show that when the degree of pledgeability is relatively low, bubbles boost long-run growth. On the other hand, when it is relatively high, bubbles lower long-run growth. Moreover, we examine the effects of the burst of bubbles, and show that the effects much depend on the degree of the pldgeability, i.e., the quality of financial system.

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    File URL: http://mpra.ub.uni-muenchen.de/24085/1/MPRA_paper_24085.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24085.

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    Date of creation: 23 Jul 2010
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    Handle: RePEc:pra:mprapa:24085
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    1. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
    2. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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    16. Nobuhiro Kiyotaki & John Moore, 2012. "Liquidity, Business Cycles, and Monetary Policy," NBER Working Papers 17934, National Bureau of Economic Research, Inc.
    17. Noriyuki Yanagawa & Gene M. Grossman, 1992. "Asset Bubbles and Endogenous Growth," NBER Working Papers 4004, National Bureau of Economic Research, Inc.
    18. Alberto Martin & Jaume Ventura, 2010. "Economic Growth with Bubbles," NBER Working Papers 15870, National Bureau of Economic Research, Inc.
    19. Christian Hellwig & Guido Lorenzoni, 2006. "Bubbles and Self-enforcing Debt," Levine's Bibliography 321307000000000383, UCLA Department of Economics.
    20. Leo Kaas, 2009. "Firm volatility and credit: a macroeconomic analysis," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 95-106.
    21. Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
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