Growth-Enhancing Bubbles

Jacques Olivier

International Economic Review, 2000, vol. 41, issue 1, 133-51

Abstract: This article challenges the conventional wisdom that speculation in financial markets reduces long-run growth. It shows that the real impact of a (rational deterministic) speculative bubble depends on the type of asset that is being speculated on. Speculative bubbles on equity raise the market value of firms, thus encouraging entrepreneurship, firm creation, investment, and growth. On the other hand, speculation on other types of assets is shown to be unambiguously growth-impairing. The model can explain some stylized facts about financial development and growth. Finally, regulatory implications are discussed briefly. Copyright 2000 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 2000
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