Speculative Growth

44 Pages Posted: 14 Dec 2002 Last revised: 31 Oct 2010

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Mohamad L. Hammour

Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)

Date Written: December 2002

Abstract

We propose a framework for understanding recurrent historical episodes of vigorous economic expansion accompanied by extreme asset valuations, as exhibited by Japan in the 1980's and the U.S. in the 1990's. We interpret this phenomenon as a high-valuation equilibrium with a low effective cost of capital based on optimism about the future availability of funds for investment. The key to the sustainability of such equilibrium is feedback from increased growth to an increase in the supply of funding. We show that such feedback arises naturally when the expansion is concentrated in a new economy' sector and when it is supported by sustained financial surpluses-both of which would constitute an integral part, as cause and consequence, of a speculative growth' equilibrium. The high-valuation equilibrium we analyze may take the form of a stock market bubble. In contrast to classic bubbles on non-productive assets, the bubbles in our model encourage real investments, boost long run savings, and may appear in dynamically efficient economies.

Suggested Citation

Caballero, Ricardo J. and Hammour, Mohamad L., Speculative Growth (December 2002). NBER Working Paper No. w9381. Available at SSRN: https://ssrn.com/abstract=362063

Ricardo J. Caballero (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
Building E52-528
Cambridge, MA 02142
United States
617-253-0489 (Phone)
617-253-1330 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mohamad L. Hammour

Ecole Normale Superieure (ENS) ( email )

48, Boulevard Jourdan
Ecole Normale Superieure
75014 Paris
France
+33 143 136 305 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
50
Abstract Views
994
PlumX Metrics