Speculative Growth

44 Pages Posted: 14 Dec 2002 Last revised: 21 Aug 2022

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Mohamad L. Hammour

Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)

Date Written: December 2002

Abstract

We propose a framework for understanding recurrent historical episodes of vigorous economic expansion accompanied by extreme asset valuations, as exhibited by Japan in the 1980's and the U.S. in the 1990's. 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 equilibrium is feedback from increased growth to an increase in the supply of funding. We show that such feedback arises naturally when the expansion is concentrated in a new economy' sector and when it is supported by sustained financial surpluses-both of which would constitute an integral part, as cause and consequence, of a speculative growth' equilibrium. The high-valuation equilibrium we analyze may take the form of a stock market bubble. In contrast to classic bubbles on non-productive assets, the bubbles in our model encourage real investments, boost long run savings, and may appear in dynamically efficient economies.

Suggested Citation

Caballero, Ricardo J. and Hammour, Mohamad L., Speculative Growth (December 2002). NBER Working Paper No. w9381, Available at SSRN: https://ssrn.com/abstract=362063

Ricardo J. Caballero (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Mohamad L. Hammour

Ecole Normale Superieure (ENS) ( email )

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France
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Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom

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