BUBBLES AND CROWDING-IN OF CAPITAL VIA A SAVINGS GLUT

Marten Hillebrand, Tomoo Kikuchi and Masaya Sakuragawa

Macroeconomic Dynamics, 2018, vol. 22, issue 5, 1238-1266

Abstract: This paper uncovers a mechanism by which bubbles crowd in capital investment. If capital formation is initially depressed by a binding credit constraint, a bubble triggers a savings glut. Higher returns in a new bubbly equilibrium attract additional savings, which are channeled to expand investment at the extensive margin, leading to permanently higher capital, output, and wages. We demonstrate that crowding-in through this channel is a robust phenomenon that occurs along the entire time path.

Date: 2018
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Related works:
Working Paper: Bubbles and Crowding-in of Capital via a Savings Glut (2014)
Working Paper: Bubbles and crowding-in of capital via a savings glut (2013)
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