Speculative growth, overreaction, and the welfare cost of technology-driven bubbles

Kevin Lansing

Journal of Economic Behavior & Organization, 2012, vol. 83, issue 3, 461-483

Abstract: This paper develops a general equilibrium model to examine the quantitative effects of speculative bubbles on capital accumulation, growth, and welfare. A near-rational bubble component in the model equity price generates excess volatility in response to observed technology shocks. In simulations, intermittent equity price run-ups coincide with positive innovations in technology, investment and consumption booms, and faster trend growth, reminiscent of the U.S. economy during the late 1920s and late 1990s. The welfare cost of speculative bubbles depends crucially on parameter values. Bubbles can improve welfare if risk aversion is low and agents underinvest relative to the socially optimal level. But for higher levels of risk aversion, the welfare cost of bubbles is large, typically exceeding 1% of annual consumption.

Keywords: Excess volatility; Asset pricing; Speculative bubbles; Endogenous growth; Business cycles (search for similar items in EconPapers)
JEL-codes: E32 E44 G12 O40 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:83:y:2012:i:3:p:461-483

DOI: 10.1016/j.jebo.2012.02.011

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