Sectoral Bubbles and Endogenous Growth

Abstract

Stock price bubbles are often on productive assets and occur in a sector of the economy. In addition, their occurrence is often accompanied by credit booms. Incorporating these features, we provide a two-sector endogenous growth model with credit-driven stock price bubbles. Bubbles have a credit easing effect in that they relax collateral constraints and improve investment efficiency. Sectoral bubbles also have a capital reallocation effect in the sense that bubbles in a sector attract more capital to be reallocated to that sector. Their impact on economic growth depends on the interplay between these two effects.

Keywords: Bubbles, Collateral Constraints, Externality, Economic Growth, Capital Reallocation, Multiple Equilibria

JEL Classification: D92, E22, E44, G1