Working Paper（25-001E）Bursting Bubbles in a Macroeconomic Model

This paper identifies the conditions and mechanisms that give rise to stochastic bubbles that are expected to collapse. To illustrate the essence of the emergence of stochastic bubbles, we first present a toy model that shows that land price bubbles that are expected to collapse emerge as the unique equilibrium outcome. Then we present a full-fledged macro-finance model of intangible capital and show that stochastic stock bubbles attached to intangible capital emerge in the process of spillover of technological innovation. The dynamics with stochastic bubbles, which is characterized by unbalanced growth, can be seen as a temporary deviation from a balanced growth path in which asset prices equal the fundamentals.

Keywords: balanced growth, intangible capital, stochastic bubbles, technological innovation, unbalanced growth.

JEL codes: D52, D53, E44, G12.