Asset Bubbles, Endogenous Growth, and Financial Frictions∗
Asset Bubbles, Endogenous Growth, and Financial Frictions∗ Tomohiro Hiranoyand Noriyuki Yanagawaz First Version, July 2010 This Version, October 2016 Abstract This paper analyzes the existence and the effects of bubbles in an endoge- nous growth model with financial frictions and heterogeneous investments. Bubbles are likely to emerge when the degree of pledgeability is in the mid- dle range, implying that improving the financial market might increase the potential for asset bubbles. Moreover, when the degree of pledgeability is rel- atively low, bubbles boost long-run growth; when it is relatively high, bubbles lower growth. Furthermore, we examine the effects of a bubble burst, and show that the effects depend on the degree of pledgeability, i.e., the quality of the financial system. Finally, we conduct a full welfare analysis of asset bubbles. Key words: Asset Bubbles, Endogenous Growth, Pledgeability, bubble burst, welfare effects of bubbles ∗This paper is a revised version of the our working paper, Hirano, Tomohiro, and Noriyuki Yanagawa. 2010 July. "Asset Bubbles, Endogenous Growth, and Financial Frictions," Working Paper, CARF-F-223, The University of Tokyo. We highly appreciate valuable comments from Francesco Caselli and four anonymous referees throughout revisions. We also thank helpful com- ments from Jean Tirole, Jose Scheinkman, Joseph Stiglitz, Kiminori Matsuyama, Fumio Hayashi, Katsuhito Iwai, Michihiro Kandori, Hitoshi Matsushima, Albert Martin, Jaume Ventura, and sem- inar participants at Econometric Society Word Congress 2010. We thank Shunsuke Hori and Jun Aoyagi for their excellent research assistance. Tomohiro Hirano acknowledges the financial sup- port from JSPS KAKENHI Grant No. 25220502, No. 15K17018, and No. 15KK0077.
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