Asset bubble and growth: Elastic labor supply with fiscal policy

Kathia Bahloul Zekkari

Journal of Mathematical Economics, 2024, vol. 110, issue C

Abstract: This paper examines the interaction between asset bubbles and endogenous growth. Using an overlapping generations model with elastic labor supply and fiscal policy, we demonstrate that the inefficiency of the equilibrium without bubble, in conjunction with specific fiscal policy criteria, guarantees the existence of a bubble. This inefficiency is due to the sub-optimality of labor supply. Furthermore, we establish a positive impact of asset bubbles on economic growth. These bubbles prompt an increase in the interest rate, encouraging households to increase their labor supply. This surge in labor supply, in turn, heightens the marginal productivity of capital stock, culminating in an increase in the growth rate. Additionally, we find that, provided certain fiscal parameters are met, asset bubbles are welfare-enhancing.

Keywords: Bubbles; Endogenous growth; Elastic labor supply; Fiscal policy; Crowding-in effect; Pareto improvement (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:110:y:2024:i:c:s0304406823001234

DOI: 10.1016/j.jmateco.2023.102930

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