Bursting Bubbles in a Macroeconomic Model

Abstract

This paper identifies the conditions and mechanisms that give rise to stochastic bubbles that are expected to collapse. To illustrate the essence of the emergence of stochastic bubbles, we first present a toy model, and then we present a full-fledged macro-finance model of intangible capital and show that stochastic stock bubbles attached to intangible capital emerge in the process of spillover of technological innovation. We show that the dynamics with stochastic bubbles, which is characterized by unbalanced growth, is a temporary deviation from a balanced growth path in which asset prices equal the fundamentals.

Tasks

Reproductions