Speculative Growth: Hints from the US Economy

Ricardo Caballero, Emmanuel Farhi, Mohamad L. Hammour

NBER Working Paper No. 10518
Issued in May 2004
NBER Program(s):   EFG   IFM

We propose a framework for understanding recurrent historical episodes of vigorous economic expansion accompanied by extreme asset valuations, as exhibited by the U.S. in the 1990s. We interpret this phenomenon as a high-valuation equilibrium with a low effective cost of capital based on optimism about the future availability of funds for investment. The key to the sustainability of such an equilibrium is feedback from increased growth to an increase in the supply of effective funding. We show that such feedback arises naturally when an expansion comes with technological progress in the capital producing sector, when fiscal rules generate sustained fiscal surpluses, when the rest of the world has lower expansion potential, and when financial constraints are relaxed by the expansion itself. Arguably, these ingredients were all simultaneously present in the U.S. during the 1990s. We also show that such expansions can be welfare improving but they can crash. The latter is more likely if bubbles develop along the expansionary path. These (rational) bubbles can emerge even when the interest rate exceeds the rate of growth of the economy.

download in pdf format
   (643 K)

email paper

This paper is available as PDF (643 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10518

Published: Caballero, Ricardo J., Emmanuel Farhi and Mohamad L. Hammour. "Speculative Growth: Hints From The U.S. Economy," American Economic Review, 2006, v96(4,Sep), 1159-1192. citation courtesy of

Users who downloaded this paper also downloaded these:
Caballero and Hammour w9381 Speculative Growth
Caballero, Farhi, and Gourinchas w11996 An Equilibrium Model of "Global Imbalances" and Low Interest Rates
Yanagawa and Grossman w4004 Asset Bubbles and Endogenous Growth
Farhi and Werning w11408 Inequality, Social Discounting and Estate Taxation
Athey and Haile w12126 Empirical Models of Auctions
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us