Asset Price Bubbles and Technological Innovation

16 Pages Posted: 5 Dec 2018

See all articles by Jong Kook Shin

Jong Kook Shin

Korea University - Sejong Campus

Chetan Subramanian

Indian Institute of Management (IIMB), Bangalore

Date Written: January 2019

Abstract

We introduce borrowing constraints into a two‐sector Schumpeterian growth model and examine the impact of asset price bubbles on innovation. In this environment, rational bubbles arise when the intermediate good producing R&D sector is faced with adverse productivity shocks. Importantly, these bubbles help alleviate credit constraints and facilitate innovation in the stagnant economy. On the policy front, we make a case for debt financed credit to the R&D sector. Further, we establish that a constant credit growth rule (akin to the Friedman rule) outperforms the often prescribed counter‐cyclical “lean against the wind” credit policy.

JEL Classification: E32, E44, O40

Suggested Citation

Shin, Jong Kook and Subramanian, Chetan, Asset Price Bubbles and Technological Innovation (January 2019). Economic Inquiry, Vol. 57, Issue 1, pp. 482-497, 2019, Available at SSRN: https://ssrn.com/abstract=3295876 or http://dx.doi.org/10.1111/ecin.12695

Jong Kook Shin (Contact Author)

Korea University - Sejong Campus ( email )

Sejong
Korea, Republic of (South Korea)

Chetan Subramanian

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

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