Bubbles, Crashes, and Economic Growth: Theory and Evidence
Pablo A. Guerron-Quintana
- American Economic Journal: Macroeconomics (Forthcoming)
We analyze the ups and downs in economic growth in recent
decades by constructing a model with recurrent bubbles, crashes,
and endogenous growth. Once realized, bubbles crowd in investment
and stimulate economic growth, but expectation about future
bubbles crowds out investment and reduces economic growth. We
identify bubbly episodes by estimating the model using the U.S.
data. Counterfactual simulations suggest that the IT and housing
bubbles not only caused economic booms but also lifted U.S. GDP
by almost 2 percentage points permanently, but the economy could
have grown even faster if people had believed that asset bubbles
would never arise.
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