Asset price bubbles and technological innovation

Document Type

Article

Publication Title

Economic inquiry

Abstract

We introduce borrowing constraints into a two-sector Schumpeterian growth model and examine the impact of asset price bubbles on innovation. In this environment, rational bubbles arise when the intermediate good producing R&D sector is faced with adverse productivity shocks. Importantly, these bubbles help alleviate credit constraints and facilitate innovation in the stagnant economy. On the policy front, we make a case for debt financed credit to the R&D sector. Further, we establish that a constant credit growth rule (akin to the Friedman rule) outperforms the often prescribed counter-cyclical “lean against the wind” credit policy

Publication Date

16-7-2018

Publisher

Blackwell Publishing Inc.

Volume

Vol.57

Issue

Iss.1

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