It may be fairly empirical that leveraged investments can cause "asset bubbles" that often result in really highly priced assets (which I'll refer to as the ("leverage argument") -- more on that here: What is an economic bubble?. I have also come across an argument that asserts a more fundamental cause is at work: loss of productivity -- which I'll refer to as "the productivity argument." To be fair, the leverage view may not be so different if we infer that leveraged investors bid up the price beyond its fundamental value (thus losing productivity/ sub-optimal allocation), but to be explicit, the productivity argument states that a bubble can form without rising prices: if the growth rate of goods increases at the same rate as the growth rate of money supply, then prices will remain constant, ceteris paribus.

By extension, investments driven by money supply growth (and not productive activities) may result in asset bubbles. Let's not go so far as to say that money supply growth and productive activities are mutually exclusive; some overlap is afforded. However, if we limit the universe of assets under consideration to only money-supply driven non-wealth creating investments, this creates an interesting theoretical/classification issue as to whether or not they would be viewed as asset bubbles. I can see the case for them being considered asset bubbles, as they would, theoretically, only exist because of growth in the money supply. However, the existing literature supports the contrary -- monetary stimulus tends to increase productivity. See: here.


Playing devil's advocate, if "the productivity argument" has any chance of mainstream recognition, then would we not have to observe a negative relationship between monetary stimulus and productivity? Or is it that current evidence does not refute the existence of non-wealth creating assets caused by money supply growth, but simply shows that, on balance they are outweighed by the vast majority of assets that do create wealth as a result of monetary stimulus?

  • $\begingroup$ I am not sure if I actually understand the argument here. The link you actually showed to support the idea that "leveraged investments can cause "asset bubbles"" actually says that this is contested and disputed in literature. Furthermore, I dont see how such asset bubbles would affect productivity in negative way. The paper to which you linked shows that productivity can be enhanced by monetary policy because in the model R&D investment depends on monetary policy and nominal interest rates. However, how would asset bubbles affect R&D investment to begin with? $\endgroup$ – 1muflon1 Nov 9 '20 at 11:51

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