Economic Growth With Bubbles

Karl Farmer and Matthias Schelnast ()
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Matthias Schelnast: University of Graz

Chapter 8 in Growth and International Trade, 2013, pp 169-188 from Springer

Abstract: Abstract This chapter introduces bubbles and financial frictions into the basic OLG growth model of Chap. 2 . Contrary to the empirical data supporting the view that bubbles cannot occur in highly developed market economies, in line with Martin and Ventura (Economic growth with bubbles. NBER Working Paper Series, Working Paper 15870, 2010; Economic growth with bubbles. Mimeo, CREI and Universitat Pompeu Fabra. Accessed July 28, 2012, from http://www.econ.upf.edu/~martin/EGB.pdf , 2011a) we now describe sufficient conditions for the existence of rational bubbles in an intertemporal equilibrium in competitive market economies. It turns out that frictions in the financial intermediation between less and highly productive investors are essential not only to establish compatibility between the theory of rational bubbles and empirical evidence, but also to provide a theoretically consistent explanation for the positive correlations between asset price bubbles and capital formation, GDP growth and aggregate consumption.

Keywords: Housing Price; Capital Stock; Capital Accumulation; Credit Market; Investor Sentiment (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/978-3-642-33669-0_8

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