RE-EXAMINATION OF THE GROWTH-ENHANCING BUBBLE

We investigate the growth and welfare effects of the bubble that arise on equities on newly created firms by R&D activities. Considering an economy where the input to the R&D sector is the final goods financed by the savings of the household sector, we show that such a bubble has a growth-enhancing effect under the condition opposite to the previous literature. We also explore the characteristics of the steady state equilibrium with the bubble and demonstrate that there can be dual bubbly equilibria, one of which is unstable and the other stable, and that the growth and welfare effects of an unexpected permanent change in the initial bubble are very different depending on which equilibrium the economy stays in.