Title: Speculative growth
Description: We propose a framework for understanding recurrent historical episodes of vigorous economic expansion accompanied by extreme asset valuations, as exhibited by Japan in the 1980s and 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 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 fiscal 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 investment, boost long-run savings, and may appear in dynamically efficient economies. Keywords: Bubbles, Investment, Cost of Capital, Growth-saving Feedback, Multiple Equilibria, Dynamic Efficiency and Inefficiency, New Economy, Spillovers, Fiscal and Current Account Surpluses. JEL Classification: D0, D9, E2, E3, G1, H3.