ECONOMIC GROWTH WITH BUBBLES

We develop a stylized model of economic growth with bubbles. In this model, financial frictions leadto equilibrium dispersion in the rates of return to investment. During bubbly episodes, unproductiveinvestors demand bubbles while productive investors supply them. Because of this, bubbly episodeschannel resources towards productive investment raising the growth rates of capital and output. Themodel also illustrates that the existence of bubbly episodes requires some investment to be dynamicallyinefficient: otherwise, there would be no demand for bubbles. This dynamic inefficiency, however,might be generated by an expansionary episode itself....