Bubbles, Crashes, and Ups and Downs in Economic Growth: Theory and Evidence

Pablo Guerron, Tomohiro Hirano and Ryo Jinnai ()

No 2119, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: We analyze the ups and downs in economic growth in recent decades by constructing a model with recurrent bubbles, crashes, and endogenous growth that can be easily taken to the data for structural estimation. Infinitely lived households expect future bubbles, which crowds out investment and reduces economic growth. For realized bubbles crowd in investment, their overall impact on economic growth and welfare crucially depends on both the level of financial development and the frequency of bubbles. We examine the US economic data through the lens of our model and identify bubbly episodes. Counterfactual simulations suggest that 1) the IT and housing bubbles not only caused economic booms but also lifted U.S. GDP by almost 2 percentage points permanently; and 2) the U.S. economy could have grown even faster in the long run if people had believed that asset bubbles would never arise.

Pages: 63 pages
Date: 2021-09
New Economics Papers: this item is included in nep-gro
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