This paper analyzes the existence and the effects of bubbles in an
endogenous growth model with financial frictions and heterogeneous
investments. Bubbles are likely to emerge when the degree of pledgeability
is in the middle range. This suggests that improving the
financial market might enhance the possibility of bubbles. We also find
that when the degree of pledgeability is relatively low, bubbles boost
long-run growth. When it is relatively high, bubbles lower growth.
Moreover, we examine the effects of bubbles bursting, and show that
the effects depend on the degree of pledgeability, i.e., the quality of
the financial system.
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