We propose a framework for understanding recurrent historical episodes of vigorous
economic expansion accompanied by extreme asset valuations, as exhibited by Japan
in the 1980's and the U.S. in the 1990's. We interpret this phenomenon as a high-valuation
equilibrium with a low effective cost of capital based on optimism about the future
availability of funds for investment. The key to the sustainability of such equilibrium
is feedback from increased growth to an increase in the supply of funding. We show
that such feedback arises naturally when the expansion is concentrated in a new economy'
sector and when it is supported by sustained financial surpluses-both of which would
constitute an integral part, as cause and consequence, of a speculative growth' equilibrium.
The high-valuation equilibrium we analyze may take the form of a stock market bubble.
In contrast to classic bubbles on non-productive assets, the bubbles in our model
encourage real investments, boost long run savings, and may appear in dynamically