Leverage, Endogenous Unbalanced Growth, and Asset Price Bubbles

Tomohiro Hirano, Ryo Jinnai () and Alexis Akira Toda

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Abstract: We develop a macro-finance model in which leverage creates a positive feedback loop between capital investment and land prices. When leverage is below a threshold, land prices equal the present value of rents. Relaxing leverage lowers the productivity of the marginal investor and the interest rate until the fundamental value diverges. The economy then undergoes a phase transition to unbalanced growth. Demand for a store of value makes land prices grow faster than rents, so a bubble necessarily emerges. When the upper tail of the productivity distribution is sufficiently thick, this regime can prevail at arbitrarily high leverage.

Date: 2022-11, Revised 2026-09
New Economics Papers: this item is included in nep-fdg and nep-gro
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Working Paper: Leverage, Endogenous Unbalanced Growth, and Asset Price Bubbles (2023)
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