Bubbles and Crowding-in of Capital via a Savings Glut

Abstract

This paper uncovers a novel mechanism by which bubbles crowd in capital investment. If capital is initially depressed by a binding credit constraint, injecting a bubble triggers a savings glut. Higher returns in a new bubbly equilibrium attract additional investors who expand investment at the extensive margin. We demonstrate that crowding-in through this channel is a robust phenomenon that occurs along the entire time path after bubbles are injected.

Entrepreneurship, Growth and Productivity With Bubbles

“…It is convenient to rewrite (22) in terms of R t+1 and z t : To this end, we use the de…nition of a t to obtain that a t+1 = k t+1 =l t+1 ; where l t+1 are the total e¢ ciency units of employment that satisfy l t+1 = N 1 + 2 ; where:…”

“…We use the de…nitions of a t+1 and of the ratio z t and equations (3) and (22) to obtain that the market clearing condition for productive capital satis…es:…”

“…Second, preference parameters, ; and ; are set so that the ratio of consumption expenditure to income equals 84% in the …rst period of life and to 85% in the second period of life. 22 Third, the parameters of the density function, min ; max and ; are set to have in the bubbly steady state an annual growth rate close to 2.5% and a fraction of the entrepreneurs in the labor force of 10.6%. 23 Forth, the labor earnings parameters and v 2 are set so that the labor income in the second period of life is 12% larger than in the …rst period and to match that the average labor income of the third quartile is 97% larger than the average labor income of the …rst quartile.…”

“…This distinction is also in Basco (2016) and in Kocherlakota (2009) in a model of in…nitely lived agents. In contrast, Hillebrand (2018) distinguishes between three groups of individuals: savers, entrepreneurs and semi-entrepreneurs. entrepreneurs.…”

Capital Bubbles, Interest Rates, and Investment in a Small Open Economy

“…Since then, many have introduced financial frictions into models of rational bubbles to explain investment booms and bubbles. Major contributions include Caballero and Krishnamurthy (2006), Caballero, Farhi, and Hammour (2006), Kocherlakota (2009), Farhi and Tirole (2012), Martin and Ventura (2011, 2012), Ventura (2012), and Hillebrand, Kikuchi, and Sakuragawa (2018).…”