Asset Price Bubbles And Economic Growth

Since 1990, the most of countries worldwide keep the inflation under control effectively, but the asset bubbles become another problem for the management of macroeconomic policy. We focus on the reason of bubbles creating and its relations with economic growth and its implications for monetary policy.Blanchard and Watson developed rational bubble theory in 1982, even within the framework of rational expectation and competitive equilibrium, there still exist multipl- equilibria in asset price, it is the source of rational bubbles. Empirically, rational bubble tests rely heavily on the model for asset pricing, sometimes we are confused which is matters: bubbles or asset pricing model itself, moreover, rational bubble theories always keep silent about why bubbles be created. In order to interpret this more clearly, the hypothesis of perfect rationale were released and the noise trade theories were developed, which devided investors into two categories:arbitragers and noise traders, which make investment on the basis of noises-notreliable information, As result, there may be systematic bias on judgment and overreact to news, even positive feedback trading, which provides self-forcingmechanism in the market-assets price increasing itself creates demand and pushprice feather go up. In order to explore the reason of bubbles, we need to analyse the behavior of investors, On the basis of bounded rationality, behavioral finance theories carry out a great deal of psychological experiments and psychological analysis.When the capital includes not only the physical but also the human capital, there are chances for labor productivity changes the trend of decreasing. Within the new economic growth theory, bubbles benefit the contemporary but blemish the welfare of the future and the damages will exceed the benefits. Because of the rent-seeking, it is not surprised for economic scandal always be disclosed when bubbles crashed.As to investment phenomenon, the herd behavior is related to information herd externality and information cascades, the positive feedback trading may be result from noise trading, the risk-shifting involves moral hazard and information asymmetry, the Ponzi scheme is like to chain cheating. All of above will push the assets price moving up far from its foundamental value.Above all, the main reasons of bubbles creating are: the bounded rationality of investors and related noise trading and positive feedback trading, the rent-seeking behavior, the information asymmetry and related herd behavior and ponzi scheme, the credit expanding including not appropriate monetary policy, the risk-shifting and the moral hazard.According to neo-classical economic growth theory, the marginal product of capital is decreasing, the technical progress is decided outside, when the capital accumulation exceeds golden-rule level, the economy will enter the dynamic inefficiency state, which means reducing capital accumulation will enhance consumer welfare. This may be why we can tolerate the moderate bubbles. But if we turn to new economic growth theory, which were developed by Romer and Lucas etc., the capital includes not only the physical but also the human capital and its accumulations will bring about positive externality, labor productivity will not decrease any longer. In the economy in which long-term economic growth will be drived mainly by capital-including physical capital, human capital and knowledges-bubbles will squeeze out savings and lower the economic growth permanently.The historical analysis of bubble events or economy. We investigate the tulip mania of Dutch in 1636, the Mississipi bubble of France in 1719, the South bubbles of England in 1720, the stock bubble of American in 1920s, the Japan bubble economy in 1980s, and summarize the general characters and the role of government policy.The implication of asset bubbles and the discussion about monetary policy. The central bank of China should investigates the issue of give up the money supply as agency targets and implement e...