Asset bubble and growth: Elastic labor supply with fiscal policy

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Abstract

This paper examines the interaction between asset bubbles and endogenous growth. Using an overlapping generations model with elastic labor supply and fiscal policy, we demonstrate that the inefficiency of the equilibrium without bubble, in conjunction with specific fiscal policy criteria, guarantees the existence of a bubble. This inefficiency is due to the sub-optimality of labor supply. Furthermore, we establish a positive impact of asset bubbles on economic growth. These bubbles prompt an increase in the interest rate, encouraging households to increase their labor supply. This surge in labor supply, in turn, heightens the marginal productivity of capital stock, culminating in an increase in the growth rate. Additionally, we find that, provided certain fiscal parameters are met, asset bubbles are welfare-enhancing.

Original languageEnglish
Article number102930
JournalJournal of Mathematical Economics
Volume110
DOIs
Publication statusPublished - Feb 2024

Keywords

  • Bubbles
  • Crowding-in effect
  • Elastic labor supply
  • Endogenous growth
  • Fiscal policy
  • Pareto improvement

ASJC Scopus subject areas

  • Economics and Econometrics
  • Applied Mathematics

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