Bubbly equilibria with credit misallocation

Jagdish Tripathy ()

No 649, Bank of England working papers from Bank of England

Abstract: This paper studies the effect of asset bubbles on economic growth in the presence of financial constraints and heterogeneous projects. I consider an economy with two sectors which differ in their productivity and the pledgeability of their output in financial markets. The first sector has low productivity and high levels of pledgeability (or low levels of financial constraints), whereas the second sector has higher productivity and lower levels of pledgeability. In this framework, asset bubbles raise interest rates and lower investment productivity by directing financial resources to the sector with lower financial constraints. Steady states in which asset bubbles lower investment productivity and consumption are termed bubbly growth-traps.

Keywords: sset bubbles; credit misallocation; inefficient investments; growth traps (search for similar items in EconPapers)
JEL-codes: O11 O16 O41 O43 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2017-02-24
New Economics Papers: this item is included in nep-dge
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0649

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