Taxation, bubbles and endogenous growth

- We study the interplay between taxation, bubble formation and economic growth in an OLG model.
- A necessary and sufficient condition for the existence of bubbles is provided.
- We figure out the cases where bubbles may harm or promote economic growth.

We study the interplay between taxation, bubble formation and economic growth. A rational bubble may be beneficial when growth is fueled by public investment (or R&D externalities) and the government levies taxes on bubble returns to finance this investment. Our main result challenges the conventional view about the negative effect of bubbles in endogenous growth (Grossman and Yanagawa, 1993).