Dynamic inefficiency, endogenous growth, and Ponzi games

King, Ian; Ferguson, D. G.

doi:10.1016/0304-3932(93)90036-f

Cited by 100 publications

(65 citation statements)

References 8 publications

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“…and replace it in (18) to obtain an effective funding function (by which here we mean saving available for investment in k):…”

Section: Capital Flowsmentioning

confidence: 99%

“…Partly for this reason, a large literature has developed to modify the basic structure. Several papers have demonstrated that, in the presence of externalities that create a wedge between private and social returns on investment, bubbles can arise even if the bubbleless economy is dynamically efficient (e.g., Saint-Paul, 1992; Grossman and Yanagawa, 1993; King and Ferguson, 1993). Ventura (2003) takes this logic a step further and shows that with segmented financial markets, bubbles may emerge when only the marginal savers face interest rates below the rate of growth of the economy.…”

Section: Introductionmentioning

confidence: 99%

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Speculative Growth: Hints from the U.S. Economy

Caballero

Farhi²,

Hammour³

2006

American Economic Review

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We propose a framework for understanding historical episodes of vigorous economic expansion accompanied by extreme asset valuations, as exhibited by the U.S. in the 1990s. We interpret this phenomenon as a high-valuation equilibrium with a low effective cost of capital based on optimism about the future availability of funds for investment. The key to the sustainability of such an equilibrium is feedback from increased growth to a decline in the long run effective cost of capital. We show that such feedback arises naturally when an expansion comes with technological progress in the capital producing sector, when fiscal rules generate sustained fiscal surpluses, when the rest of the world has lower expansion potential or high saving needs, and when financial constraints are relaxed by the expansion itself. Arguably, these ingredients were all simultaneously present in the U.S. during the 1990s. We also show that speculative growth episodes facilitate the emergence of (rational) bubbles. These bubbles can now arise even if interest rates exceed the rate of growth of the economy, and exhibit positive rather than negative comovement with real investment.

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“…and replace it in (18) to obtain an effective funding function (by which here we mean saving available for investment in k):…”

Section: Capital Flowsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Speculative Growth: Hints from the U.S. Economy

Caballero

Farhi²,

Hammour³

2006

American Economic Review

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show abstract

“…Saint-Paul (1992), Grossman and Yanagawa (1993), and King and Ferguson (1993) extend the Samuelson-Tirole model to economies with endogenous growth due to externalities in capital accumulation. In their models, bubbles slow down the growth rate of the economy.…”

Section: Introductionmentioning

confidence: 99%

Economic Growth with Bubbles

Martín

Ventura

2010

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We develop a stylized model of economic growth with bubbles. In this model, financial frictions lead to equilibrium dispersion in the rates of return to investment. During bubbly episodes, unproductive investors demand bubbles while productive investors supply them. Because of this, bubbly episodes channel resources towards productive investment raising the growth rates of capital and output. The model also illustrates that the existence of bubbly episodes requires some investment to be dynamically inefficient: otherwise, there would be no demand for bubbles. This dynamic inefficiency, however, might be generated by an expansionary episode itself.

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“…In addition to forgone returns to capital, entrepreneurial housing investment reduces the lifetime income of future entrepreneurs and, thus, nega- 36 These results are available upon request. 37 A similar wedge between social and private rates of return for capital occurs in the endogenous growth models of Grossman and Yanagawa (1993) and King and Ferguson (1993), in which the labor productivity of individual firms depends positively on the aggregate stock of capital. 38 A combination of .15/ and .28/ implies .1 / .1 / < ; which is guaranteed by m t w t ; the necessary condition for the young entrepreneur to work as a manager rather than a worker.…”

Section: American Economic Journal Month Yearmentioning

confidence: 90%