Working Paper: NBER ID: w4004
Authors: 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.
Keywords: Asset Bubbles; Endogenous Growth; Economic Welfare
JEL Codes: E32; E44; O41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size of asset bubbles (E32) | conditions for existence of asset bubbles (E32) |
| existence of asset bubbles (E32) | economic growth (O49) |
| economic growth (O49) | welfare of future generations (I31) |