Asset Bubbles, Endogenous Growth, and Financial Frictions
41 Pages Posted: 19 Sep 2010 Last revised: 29 Feb 2012
Date Written: September 17, 2010
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: Suggested Citation