Working Paper: NBER ID: w15870
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, unproductive investors demand bubbles while productive investors supply them. Because of this, bubbly episodes channel resources towards productive 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: Bubbles; Economic Growth; Financial Frictions
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 |
|---|---|
| bubbles (E32) | productive investment (E22) |
| productive investment (E22) | growth rates of capital (O40) |
| bubbles (E32) | growth rates of capital (O40) |
| bubbles (E32) | growth rates of output (O40) |
| productive investment (E22) | growth rates of output (O40) |
| bubbles (E32) | capital stock (E22) |
| bubbles (E32) | dynamic inefficiency (D59) |
| dynamic inefficiency (D59) | demand for bubbles (E32) |
| financial frictions (G19) | existence of bubbles (E32) |
| financial frictions (G19) | expansionary episodes (E65) |