Journal
JOURNAL OF MATHEMATICAL ECONOMICS
Volume 110, Issue -, Pages -Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jmateco.2023.102930
Keywords
Bubbles; Endogenous growth; Elastic labor supply; Fiscal policy; Crowding-in effect; Pareto improvement
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This paper examines the interaction between asset bubbles and endogenous growth, demonstrating the positive impact of asset bubbles on economic growth. Furthermore, it finds that under certain fiscal parameters, asset bubbles can enhance welfare.
This paper examines the interaction between asset bubbles and endogenous growth. Using an overlapping generations model with elastic labor supply and fiscal policy, we demonstrate that the inefficiency of the equilibrium without bubble, in conjunction with specific fiscal policy criteria, guarantees the existence of a bubble. This inefficiency is due to the sub-optimality of labor supply. Furthermore, we establish a positive impact of asset bubbles on economic growth. These bubbles prompt an increase in the interest rate, encouraging households to increase their labor supply. This surge in labor supply, in turn, heightens the marginal productivity of capital stock, culminating in an increase in the growth rate. Additionally, we find that, provided certain fiscal parameters are met, asset bubbles are welfare-enhancing.
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