Working Paper（23-015E）Leverage, Endogenous Unbalanced Growth, and Asset Price Bubbles

We present a new theoretical framework to think about asset price bubbles in dividend-paying assets. We study a general equilibrium microfinance model with a positive feedback loop between capital investment and land price, whose magnitude is affected by financial leverage. As leverage is relaxed beyond a critical value, a phase transition occurs from balanced growth of a stationary nature where land prices reflect fundamentals (present value of rents) to unbalanced growth of a nonstationary nature where land prices grow faster than rents, generating a land price bubble. Unbalanced growth dynamics and bubbles are associated with financial deregulation and technological progress.

Keywords : land bubble, leverage, nonstationarity, phase transition, unbalanced growth.

JEL codes : D52, D53, E44, G12.