Asset Bubbles, Endogenous Growth, and Financial Frictions

41 Pages Posted: 19 Sep 2010 Last revised: 29 Feb 2012

See all articles by Tomohiro Hirano

Tomohiro Hirano

Royal Holloway, U of London and Center for Macroeconomics at the London School of Economics and the Canon Institute for Global Studies

Noriyuki Yanagawa

University of Tokyo - Faculty of Economics

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Date Written: September 17, 2010

Abstract

This paper analyzes the existence and the effects of bubbles in an endogenous growth model with financial frictions and heterogeneous investments. Bubbles are likely to emerge when the degree of pledgeability is in the middle range. This suggests that improving the financial market might enhance the possibility of bubbles. We also find that when the degree of pledgeability is relatively low, bubbles boost long-run growth. When it is relatively high, bubbles lower growth. Moreover, we examine the effects of bubbles bursting, and show that the effects depend on the degree of pledgeability, i.e., the quality of the financial system.

Keywords: Asset Bubbles, Growth, Financial Frictions

JEL Classification: E44

Suggested Citation

Hirano, Tomohiro and Yanagawa, Noriyuki, Asset Bubbles, Endogenous Growth, and Financial Frictions (September 17, 2010). Available at SSRN: https://ssrn.com/abstract=1679251 or http://dx.doi.org/10.2139/ssrn.1679251

Tomohiro Hirano (Contact Author)

Royal Holloway, U of London and Center for Macroeconomics at the London School of Economics and the Canon Institute for Global Studies ( email )

London
United Kingdom

Noriyuki Yanagawa

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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