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Capital gains

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  • Luís Aguiar‐Conraria
  • Karl Shell

Abstract

We analyze a simple overlapping‐generations model with two capital goods. The dynamical system is defined by savings behavior and short‐run perfect‐foresight asset‐market clearing. Because lifetimes are finite, there is no transversality condition. If there is a bubble in asset pricing, it will burst in finite time: expectations will eventually be frustrated, but this might take several generations. This raises the question of whether (infinite) long‐run perfect foresight is a reasonable assumption for overlapping‐generations economies and, hence, whether bursting bubbles can occur in equilibrium.

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  • Luís Aguiar‐Conraria & Karl Shell, 2006. "Capital gains," International Journal of Economic Theory, The International Society for Economic Theory, vol. 2(3‐4), pages 331-349, September.
    • Handle: RePEc:bla:ijethy:v:2:y:2006:i:3-4:p:331-349
    DOI: 10.1111/j.1742-7363.2006.0039.x
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    1. K. Shell, 1968. "Applications of Pontryagin's Maximum Principle of Economics," Working papers 16, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Jean-Michel Grandmont, 1974. "On the Short-Run Equilibrium in a Monetary Economy," International Economic Association Series, in: Jacques H. Drèze (ed.), Allocation under Uncertainty: Equilibrium and Optimality, chapter 12, pages 213-228, Palgrave Macmillan.
    3. Grandmont, Jean-Michel, 1993. "Temporary general equilibrium theory," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 19, pages 879-922, Elsevier.
    4. Grandmont, Jean-Michel & Hildenbrand, Werner, 1974. "Stochastic processes of temporary equilibria," Journal of Mathematical Economics, Elsevier, vol. 1(3), pages 247-277, December.
    5. Luís Aguiar‐Conraria & Karl Shell, 2006. "Capital gains," International Journal of Economic Theory, The International Society for Economic Theory, vol. 2(3‐4), pages 331-349, September.
    6. Magill, Michael & Quinzii, Martine, 2003. "Nonshiftable capital, affine price expectations and convergence to the Golden Rule," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 239-272, June.
    7. K. Shell & M. Sidrauski & J. E. Stiglitz, 1969. "Capital Gains, Income, and Saving," Review of Economic Studies, Oxford University Press, vol. 36(1), pages 15-26.
    8. C. Caton & K. Shell, 1971. "An Exercise in the Theory of Heterogeneous Capital Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(1), pages 13-22.
    9. Benhabib Jess & Rustichini Aldo, 1994. "Introduction to the Symposium on Growth, Fluctuations, and Sunspots: Confronting the Data," Journal of Economic Theory, Elsevier, vol. 63(1), pages 1-18, June.
    10. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
    11. Burmeister, Edwin, et al, 1973. "The "Saddlepoint Property" and the Structure of Dynamic Heterogeneous Capital Good Models," Econometrica, Econometric Society, vol. 41(1), pages 79-95, January.
    12. Edwin Burmeister & Daniel A. Graham, 1974. "Multi-sector Economic Models with Continuous Adaptive Expectations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(3), pages 323-336.
    13. A. B. Atkinson, 1971. "The Timescale of Economic Model How Long is the Long Run?," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 19, pages 248-263, Palgrave Macmillan.
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    1. John H. Boyd & Sangmok Choi & Bruce Smith, 1996. "Inflation, financial markets and capital formation," Proceedings, Federal Reserve Bank of St. Louis, vol. 78(May), pages 9-35.
    2. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2007. "Minimum Consumption Requirements and Cycles in an Overlapping Generations Model of Money," Staff General Research Papers Archive 12834, Iowa State University, Department of Economics.
    3. Roger Haefen, 2008. "Latent Consideration Sets and Continuous Demand Systems," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(3), pages 363-379, November.
    4. Luís Aguiar‐Conraria & Karl Shell, 2006. "Capital gains," International Journal of Economic Theory, The International Society for Economic Theory, vol. 2(3‐4), pages 331-349, September.
    5. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2010. "Resurrecting equilibria through cycles in an overlapping generations model of money," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 515-526, June.
    6. Kaushik Basu, 2009. "A Marketing Scheme for Making Money off Innocent People: A User’s Manual," Working Papers id:2341, eSocialSciences.
    7. Richard C. Barnett & Joydeep Bhattacharya & Helle Bunzel, 2007. "Resurrecting Equilibria Through Cycles," Economics Working Papers 2007-12, Department of Economics and Business Economics, Aarhus University.

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