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Capital gains

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  • Luís Aguiar-Conraria
  • Karl Shell

Abstract

Capital gains play an important, positive role in the inter-temporal allocation of resources, but they can also be a source of economic instability. We analyze a simple overlapping-generations economy with two capital goods and irreversible investment. For each vector of initial capital/labor ratios, there is one and only one trajectory on which expectations are realized at every date. If there is any deviation from this trajectory, then there is a bubble which must burst in finite time.

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Bibliographic Info

Article provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.

Volume (Year): 2 (2006)
Issue (Month): 3-4 ()
Pages: 331-349

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Handle: RePEc:bla:ijethy:v:2:y:2006:i:3-4:p:331-349

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References

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  1. K. Shell & M. Sidrauski & J. E. Stiglitz, 1967. "Capital Gains, Income, and Saving," Working papers 12, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Grandmont, Jean-Michel & Hildenbrand, Werner, 1974. "Stochastic processes of temporary equilibria," Journal of Mathematical Economics, Elsevier, vol. 1(3), pages 247-277, December.
  3. Aguiar-Conraria, Luis & Shell, Karl, 2006. "Capital Gains," Working Papers 06-02, Cornell University, Center for Analytic Economics.
  4. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  5. Caton, C & Shell, Karl, 1971. "An Exercise in the Theory of Heterogeneous Capital Accumulation," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 13-22, January.
  6. K. Shell, 1968. "Applications of Pontryagin's Maximum Principle of Economics," Working papers 16, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Grandmont, Jean-Michel, 1977. "Temporary General Equilibrium Theory," Econometrica, Econometric Society, vol. 45(3), pages 535-72, April.
  8. Atkinson, Anthony B, 1969. "The Timescale of Economic Models: How Long Is the Long Run?," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 137-52, April.
  9. 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.
  10. Burmeister, Edwin & Graham, Daniel A, 1974. "Multi-sector Economic Models with Continuous Adaptive Expectations," Review of Economic Studies, Wiley Blackwell, vol. 41(3), pages 323-36, July.
  11. 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.
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Cited by:
  1. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2010. "Resurrecting Equilibria Through Cycles in an Overlapping Generations Model of Money," Staff General Research Papers 32099, Iowa State University, Department of Economics.
  2. Kaushik Basu, 2009. "A Marketing Scheme for Making Money off Innocent People: A User’s Manual," Working Papers id:2341, eSocialSciences.
  3. Aguiar-Conraria, Luis & Shell, Karl, 2006. "Capital Gains," Working Papers 06-02, Cornell University, Center for Analytic Economics.
  4. Roger Haefen, 2008. "Latent Consideration Sets and Continuous Demand Systems," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 41(3), pages 363-379, November.
  5. Richard C. Barnett & Joydeep Bhattacharya & Helle Bunzel, 2007. "Resurrecting Equilibria Through Cycles," Economics Working Papers 2007-12, School of Economics and Management, University of Aarhus.
  6. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2007. "Minimum Consumption Requirements and Cycles in an Overlapping Generations Model of Money," Staff General Research Papers 12834, Iowa State University, Department of Economics.

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