Speculative growth
Subtitle: Hints from the US economy
By: Ricardo Caballero, Emmanuel Farhi, Mohamad L. Hammour.
Contributors: Farhi, Emmanuel.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10518; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10518.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Speculation -- United States.; Economic development.; United States -- Economic conditions -- 1981-2001.
Description: "We propose a framework for understanding recurrent historical episodes of vigorous economic expansion accompanied by extreme asset valuations, as exhibited by the U.S.  in the 1990s.  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 an equilibrium is feedback from increased growth to an increase in the supply of effective funding.  We show that such feedback arises naturally when an expansion comes with technological progress in the capital producing sector, when fiscal rules generate sustained fiscal surpluses, when the rest of the world has lower expansion potential, and when financial constraints are relaxed by the expansion itself.  Arguably, these ingredients were all simultaneously present in the U.S.  during the 1990s.  We also show that such expansions can be welfare improving but they can crash.  The latter is more likely if bubbles develop along the expansionary path.  These (rational) bubbles can emerge even when the interest rate exceeds the rate of growth of the economy"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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