Asset price bubbles and endogenous growth
Description
We introduce borrowing constraints into a two-sector Schumpeterian growth model and examine the impact of asset price bubbles on innovation. In this setting, rational bubbles arise when the intermediate goods-producing R&D sector faces adverse productivity shocks. Importantly, these bubbles help alleviate credit constraints and facilitate innovation in an otherwise stagnant economy. From a policy perspective, we argue in favor of debt-financed credit for the R&D sector. Furthermore, we demonstrate that a constant credit growth rule—akin to the Friedman rule—outperforms the commonly prescribed counter-cyclical “lean-against-the-wind” credit policy.
Copyright Date
January 2014
Publication Date
1-1-2014
Keywords
Technological innovation, Credit policy
Conference
IMB-IMF Conference on Housing Markets, Financial Stability and Growth, 11-12 December, 2014, Bengaluru
