THESIS
2011

vii, 79, [15] p. : ill. ; 30 cm

**Abstract**
This thesis contains two parts. In the first part (Chapter 1 and 2), I study
the existence of rational bubbles and the impact of these bubbles on the real
economy in various infinite-horizon models. In the second part, I revisit the
long-run relationship between money and growth, by modelling the liquidity
channel at the firm level. Chapter 1 explores the existence of rational bubbles
in the pricing of an asset that pays no dividend. I find that when the
"spirit of capitalism" is introduced into a growth model, rational bubbles do
exist provided that the marginal benefit from holding wealth is nontrivial
relative to the marginal utility of consumption as time goes to infinity. I use
phase diagrams to discuss the property of the bubbly equilibrium and I use
two examples to desc...[

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This thesis contains two parts. In the first part (Chapter 1 and 2), I study
the existence of rational bubbles and the impact of these bubbles on the real
economy in various infinite-horizon models. In the second part, I revisit the
long-run relationship between money and growth, by modelling the liquidity
channel at the firm level. Chapter 1 explores the existence of rational bubbles
in the pricing of an asset that pays no dividend. I find that when the
"spirit of capitalism" is introduced into a growth model, rational bubbles do
exist provided that the marginal benefit from holding wealth is nontrivial
relative to the marginal utility of consumption as time goes to infinity. I use
phase diagrams to discuss the property of the bubbly equilibrium and I use
two examples to describe the bubbly equilibrium trajectory explicitly and
more intuitively. Moreover, I show that a stochastic bubble, which bursts
with an exogenous probability, could exist. This phenomenon could provide
a simple theoretical foundation to explore economic implications of the collapse
of bubbles. Chapter 2 extends the discussion in the previous chapter
when the asset in question pays positive dividends. I show that rational
bubbles still exist in a growing economy. The existence of bubbles depends
on the relative magnitudes of risk aversion parameters in consumption and
in wealth. Furthermore, I examine how exogenous shocks to technology affect
the birth of bubbles. Chapter 3 revisits the relationship between money
and long-run growth when liquidity demand at the firm level is explicitly
modelled. Through a set of sensitivity analyses, I find that this relationship
could be positive, negative, or display a hump shape depending on the size
of average liquidity demand and the level of financial development. These
results explain why existing empirical studies report mixed findings on the
relationship.

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