American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Economic Growth with Bubbles
American Economic Review
vol. 102,
no. 6, October 2012
(pp. 3033–58)
Abstract
We develop a stylized model of economic growth with bubbles in which changes in investor sentiment lead to the appearance and collapse of macroeconomic bubbles or pyramid schemes. 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 economic efficiency thereby expanding consumption, the capital stock and output. When bubbly episodes end, there is a fall in consumption, the capital stock and output. We argue that the stochastic equilibria of the model provide a natural way of introducing bubble shocks into business cycle models. (JEL E22, E23, E32, E44, O41)Citation
Martin, Alberto, and Jaume Ventura. 2012. "Economic Growth with Bubbles." American Economic Review, 102 (6): 3033–58. DOI: 10.1257/aer.102.6.3033JEL Classification
- E22 Capital; Investment; Capacity
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- O41 One, Two, and Multisector Growth Models