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Economic growth with bubbles

Alberto Martin and Jaume Ventura ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We develop a stylized model of economic growth with bubbles. In this model, changes in investor sentiment lead to the appearance and collapse of macroeconomic bubbles or pyramid schemes. We show how these bubbles mitigate the effects of financial frictions. During bubbly episodes, unproductive investors demand bubbles while productive investors supply them. These transfers of resources improve the efficiency at which the economy operates, expanding consumption, the capital stock and output. When bubbly episodes end, these transfers stop and consumption, the capital stock and output contract. We characterize the stochastic equilibria of the model and argue that they provide a natural way of introducing bubble shocks into business cycle models.

Keywords: bubbles; dynamic inefficiency; economic growth; financial frictions; pyramid schemes (search for similar items in EconPapers)
JEL-codes: E32 E44 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-fin, nep-fmk and nep-mac
Date: 2003-11, Revised 2011-09
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Related works:
Journal Article: Economic Growth with Bubbles (2012) Downloads
Working Paper: Economic Growth with Bubbles (2010) Downloads
Working Paper: Economic Growth with Bubbles (2010) Downloads
Working Paper: Economic Growth with Bubbles (2010) Downloads
Working Paper: Economic Growth with Bubbles (2010) Downloads
Working Paper: Economic Growth with Bubbles (2003) Downloads
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