Asset bubbles, entrepreneurial risks, and economic growth

Economic Growth with Bubbles

We develop a stylized model of economic growth with bubbles. In this model, changes in investor sentiment lead to the appearance and collapse of macroeconomic bubbles or pyramid schemes. We show how 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 ...

Asset Bubbles and the Cost of Economic Fluctuations

Lucas (1987, 2003) estimates that the cost of ‡uctuations is less than 0.1% of consumption. In other words, a social planner would pay no more than 0.1% of (permanent) consumption to eliminate all future business cycle ‡uctuations. The current paper extends Lucas’calculations by studying the costs of ‡uctuations arising from asset bubbles. We estimate two classes of costs: consumption volatilit...

Asset bubbles and the cost of economic uctuations

Lucas (1987, 2003) estimates that the cost of ‡uctuations is less than 0.1% of consumption. In other words, a social planner would pay no more than 0.1% of (permanent) consumption to eliminate all future business cycle ‡uctuations. The current paper extends Lucas’calculations by studying the costs of ‡uctuations arising from asset bubbles. We estimate two classes of costs: consumption volatilit...

Asset Bubbles and Overlapping Generations

Asset Float and Speculative Bubbles

We model the relationship between asset float (tradeable shares) and speculative bubbles. Investors with heterogeneous beliefs and short-sales constraints trade a stock with limited float because of insider lockups. A bubble arises as price overweighs optimists’ beliefs and investors anticipate the option to resell to those with even higher valuations. The bubble’s size depends on float as inve...