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Speculative growth : hints from the US economy

Author: Ricardo J Caballero; Emmanuel Farhi; Mohamad L Hammour; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2004.
Series: Working paper series (National Bureau of Economic Research), no. 10518.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
"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  Read more...
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Additional Physical Format: Print version:
Caballero, Ricardo J.
Speculative growth.
Cambridge, Mass. : National Bureau of Economic Research, ©2004
(OCoLC)55739385
Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Ricardo J Caballero; Emmanuel Farhi; Mohamad L Hammour; National Bureau of Economic Research.
OCLC Number: 56508671
Notes: "May 2004."
Reproduction Notes: Electronic reproduction. [S.l.] : HathiTrust Digital Library, 2010. MiAaHDL
Description: 1 online resource (50 pages) : illustrations.
Details: Master and use copy. Digital master created according to Benchmark for Faithful Digital Reproductions of Monographs and Serials, Version 1. Digital Library Federation, December 2002.
Series Title: Working paper series (National Bureau of Economic Research), no. 10518.
Responsibility: Ricardo Caballero, Emmanuel Farhi, Mohamad L. Hammour.

Abstract:

"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.

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