Working Paper: CEPR ID: DP7770
Authors: Alberto Martin; Jaume Ventura
Abstract: 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.
Keywords: asset bubbles; dynamic inefficiency; economic growth; financial frictions; pyramid schemes
JEL Codes: E32; E44; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bubbly episodes (Y60) | efficient investment (D61) |
| inefficient investments (G31) | demand for bubbles (E32) |
| efficient investments (D61) | supply of bubbles (E32) |
| bubbly episodes (Y60) | growth rates of capital and output (O40) |
| dynamic inefficiency (D59) | bubble formation (E32) |
| bubbly episodes (Y60) | expansions in capital stock and output (E22) |