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Asset bubbles, economic growth, and a self-fulfilling financial crisis

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  • Kunieda, Takuma
  • Shibata, Akihisa

Abstract

A tractable model in which asset bubbles can exist in spite of infinitely lived agents is presented. An intrinsically useless asset has a positive value and raises welfare because it helps investors with idiosyncratic productivity to obtain more credit in imperfect financial markets. However, the bubbly equilibrium is only the second best. Moreover, bubbles may burst, and this leads to recessions. The model׳s analytical solution allows for the study of many policies. We find that a policy of purchasing the asset avoids financial crises but nevertheless results in the second-best outcome. A policy that taxes depositors and subsidizes investors both prevents crashes and achieves the first-best outcome.

Suggested Citation

  • Kunieda, Takuma & Shibata, Akihisa, 2016. "Asset bubbles, economic growth, and a self-fulfilling financial crisis," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 70-84.
    • Handle: RePEc:eee:moneco:v:82:y:2016:i:c:p:70-84
    DOI: 10.1016/j.jmoneco.2016.07.001
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    More about this item

    Keywords

    E32; E44; O41; Keywords:; Financial market imperfections; Economic growth; Financial crisis; Asset bubbles; Government policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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