Economic Growth with Bubbles

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)

Managing Credit Bubbles

“…The model developed here builds upon previous work by Martin and Ventura (, ). In Martin and Ventura (), we analyzed the existence and macroeconomic effects of bubbles in an economy with extreme financial frictions that impede credit. In Martin and Ventura (), we extended the analysis to an economy with credit, and argued that bubbles could be a source of collateral.…”

Intertemporal coordination with delay options

“…Here we are interested on how common uncertainty about the future value of the asset affects its liquidity. 13 Martin and Ventura [17] is another recent model of asset trading that employs an OLG framework.…”

Switching bubbles: From Outside to Inside Bubbles

“…The interaction between financial market imperfections and bubbles was also studied in, for example, Azariadis and Smith (1993), Caballero and Krishnamurthy (2006), Farhi and Tirole (2012), Arce and López-Salido (2011), Martin and Ventura (2012), Bao (2015) and Aoki and Nikolov (2015). The closest paper is Arce and López-Salido (2011), which also have two bubbles.…”

“…This list includes, among others, Tirole (1985), , Farhi and Tirole (2012) and Martin and Ventura (2012). Standard models of bubbles, like in Tirole (1985), find a negative relationship between bubbles and investment.…”

“…New models of bubbles have tried to find a positive comovement. For example, in Martin and Ventura (2012) bubbles increase investment because inefficient entrepreneurs buy the bubble, which favors efficient entrepreneurs. Therefore, another departure from the related literature is to show that Inside and Outside Bubbles have different effects on investment and debt of manufacturing firms, as observed in the data.…”