Asset bubbles, economic growth, and a self-fulfilling financial crisis: a dynamic general equilibrium model of infinitely lived heterogeneous agents
Year: 2012
Type: report
Abstract: We develop a dynamic general equilibrium growth model with infinitely lived heterogeneous agents to describe a self-fulfilling financial crisis accompanied by an asset bubble burst as a rational expectations equilibrium. Because of financial market imperfections, asset bubbles appear under mild parameter conditions even though we assume infinitely lived agents. Although these bubbles have both a crowd-in liquidity effect and a crowd-out effect on investment, the former effect always dominates the latter. Thus, a self-fulfilling financial crisis accompanied by an asset bubble burst results in an economic recession. This phenomenon is consistent with empirical observations on financial crises in the existing literature. In addition, we present an effective government policy to avoid self-fulfilling financial crises.
Authors: Takuma Kunieda, Akihisa Shibata
Institutions: City University of Hong Kong, Kyoto University
Language: English
Topic: Economic theories and models
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1653431465