IDEAS home Printed from https://ideas.repec.org/a/eee/moneco/v96y2018icp109-123.html
   My bibliography  Save this article

Rational bubbles and public debt policy: A quantitative analysis

Author

Listed:
  • Domeij, David
  • Ellingsen, Tore

Abstract

Do empirically plausible dynastic general equilibrium models admit bubbles and Ponzi-schemes under rational expectations? Contrary to conventional wisdom, the answer is affirmative. The central assumption is that current securities do not represent claims to all future profits. Calibrating the model to U.S. data, we find that it is consistent with the presence of rational bubbles. The observed level of public debt is entirely a Ponzi-scheme. There are large welfare gains from eliminating bubbles on private assets and lodging all the non-fundamental asset value in public debt. Paying off public debt benefits only a small group of wealthy individuals.

Suggested Citation

  • Domeij, David & Ellingsen, Tore, 2018. "Rational bubbles and public debt policy: A quantitative analysis," Journal of Monetary Economics, Elsevier, vol. 96(C), pages 109-123.
    • Handle: RePEc:eee:moneco:v:96:y:2018:i:c:p:109-123
    DOI: 10.1016/j.jmoneco.2018.04.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304393218301909
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jmoneco.2018.04.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Clemens Fuest & Klaus Gründler & Niklas Potrafke & Marcel Fratzscher & Alexander Kriwoluzky & Claus Michelsen & Michael Hüther & Peter Bofinger & Lars P. Feld & Wolf Heinrich Reuter, 2019. "Schuldenbremse — Investitionshemmnis oder Vorbild für Europa? [Debt Brake — Investment Barrier or Role Model for Europe?]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 99(5), pages 307-329, May.
    2. Dong, Feng & Xu, Zhiwei, 2022. "Bubbly bailout," Journal of Economic Theory, Elsevier, vol. 202(C).
    3. Narayana R. Kocherlakota, 2023. "Public Debt Bubbles In Heterogeneous Agent Models With Tail Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 491-509, May.
    4. Tomohiro Hirano & Alexis Akira Toda, 2023. "Unique Equilibria in Models of Rational Asset Price Bubbles," CIGS Working Paper Series 23-005E, The Canon Institute for Global Studies.
    5. Tomohiro Hirano & Alexis Akira Toda, 2023. "Bubble Necessity Theorem," CIGS Working Paper Series 23-011E, The Canon Institute for Global Studies.
    6. Gonzalo F. de-Córdoba & Benedetto Molinari & José L. Torres, 2021. "Public Debt Frontier: A Python Toolkit for Analyzing Public Debt Sustainability," Sustainability, MDPI, vol. 13(23), pages 1-25, November.
    7. Hirano, Tomohiro & Toda, Alexis Akira, 2024. "Bubble economics," LSE Research Online Documents on Economics 122042, London School of Economics and Political Science, LSE Library.
    8. Atif Mian & Ludwig Straub & Amir Sufi, 2021. "A Goldilocks Theory of Fiscal Policy," Working Papers 2021-37, Princeton University. Economics Department..
    9. Rogoff, Kenneth, 2020. "Falling real interest rates, rising debt: A free lunch?," Journal of Policy Modeling, Elsevier, vol. 42(4), pages 778-790.
    10. David Domeij & Tore Ellingsen, 2020. "Rational Bubbles in UK Housing Markets: Comment on “No‐Bubble Condition: Model‐Free Tests in Housing Markets”," Econometrica, Econometric Society, vol. 88(4), pages 1755-1766, July.
    11. Osband, Kent & Filoso, Valerio & Capasso, Salvatore, 2024. "The limits of limitless debt," Journal of Macroeconomics, Elsevier, vol. 79(C).
    12. Rogoff, Kenneth, 2021. "Fiscal sustainability in the aftermath of the great pause," Journal of Policy Modeling, Elsevier, vol. 43(4), pages 783-793.

    More about this item

    Keywords

    Bubbles; Incomplete markets; Fiscal policy;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:moneco:v:96:y:2018:i:c:p:109-123. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505566 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.