Bubbly Equilibria with Credit Misallocation

30 Pages Posted: 28 Feb 2017

Date Written: February 24, 2017

Abstract

This paper studies the effect of asset bubbles on economic growth in the presence of financial constraints and heterogeneous projects. I consider an economy with two sectors which differ in their productivity and the pledgeability of their output in financial markets. The first sector has low productivity and high levels of pledgeability (or low levels of financial constraints), whereas the second sector has higher productivity and lower levels of pledgeability. In this framework, asset bubbles raise interest rates and lower investment productivity by directing financial resources to the sector with lower financial constraints. Steady states in which asset bubbles lower investment productivity and consumption are termed bubbly growth-traps.

Keywords: Asset bubbles, credit misallocation, inefficient investments, growth traps

JEL Classification: O11, O16, O41, O43

Suggested Citation

Tripathy, Jagdish, Bubbly Equilibria with Credit Misallocation (February 24, 2017). Bank of England Working Paper No. 649, Available at SSRN: https://ssrn.com/abstract=2924407 or http://dx.doi.org/10.2139/ssrn.2924407

Jagdish Tripathy (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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