American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Speculative Growth: Hints from the U.S. Economy
American Economic Review
vol. 96,
no. 4, September 2006
(pp. 1159–1192)
Abstract
We propose a framework for understanding episodes of vigorous economic expansion and extreme asset valuations. We interpret this phenomenon as a highvaluation equilibrium with a low cost of capital based on optimism about future funding. The key ingredient for such equilibrium is feedback from increased growth to a decline in the long-run cost of capital. This feedback arises when an expansion comes with technological progress in the capital sector, when fiscal rules generate procyclical fiscal surpluses, when the rest of the world has lower expansion potential or high saving needs, and when financial constraints are relaxed by the expansion itself. (JEL E22, O33, O41)Citation
Caballero, Ricardo, J., Emmanuel Farhi, and Mohamad L. Hammour. 2006. "Speculative Growth: Hints from the U.S. Economy." American Economic Review, 96 (4): 1159–1192. DOI: 10.1257/aer.96.4.1159Additional Materials
JEL Classification
- E22 Capital; Investment; Capacity
- O33 Technological Change: Choices and Consequences; Diffusion Processes
- O41 One, Two, and Multisector Growth Models