Ricerc@Sapienza

I develop an OLG model with population growth in order to show how bubbles can prevent secular stagnation, despite structural changes putting downward pressure on the interest rates. This result sheds light on the US economic performance before the 2007-2008 crisis, which was characterized by falling interest rates, asset price bubbles and the absence of zero lower bound (ZLB) episodes.
Financial bubbles affects the real interest rate through two channels. Firstly, they are store of value (¿saving channel¿) and the presence of an alternative investment vehicle decreases savings. Secondly, they serve as a collateral (¿borrowing channel¿) in the credit market. This, on the one hand, stimulates the demand for borrowing of young households. On the other hand, it reduces savings by increasing the debt of middle-aged households. Overall, these effects determine an higher real interest rate in a bubbly economy than in a bubbleless one. This prevents the central bank from hitting the ZLB, when a permanent shock occurs