Asset Bubbles, Entrepreneurial Risks, and Economic Growth

Takeo Hori () and Ryonghun Im ()
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Takeo Hori: Tokyo Institute of Technology
Ryonghun Im: Kyoto University

No 1052, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: Entrepreneurs are exposed to large uninsured risks. The risks may discourage them from creating productive assets. This may generate a productive asset shortage and stimulate demand for speculative bubbles. We introduce entrepreneurial risks into a textbook growth model with infinitely lived agents. In our model, entrepreneurs face no credit constraints. If the degree of entrepreneurial risks is in the middle range, bubbles are likely to emerge. If the degree of entrepreneurial risks is high, bubbles promote growth because bubbles work as a buffer for the risks. Otherwise, bubbles lower growth. The effect of the collapse of bubbles also depends on the degree of the risks. Moreover, asset bubbles amplify fundamental shocks.

Keywords: asset bubbles; idiosyncratic risks; incomplete insurance; amplification; growth effect; welfare analysis. (search for similar items in EconPapers)
JEL-codes: E21 E23 E44 G01 G11 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2021-01
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-ore
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