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Capital Gains: Blue Machines And Red Machines

Author

Listed:
  • LUÍS AGUIAR-CONRARIA

    (Departmento de Economia, Escola de Economia e Gestao, Universidade do Minho, Campus de Gualtar, 4710-57 Braga, Portugal)

  • KARL SHELL

    (Department of Economics, Cornell University, 402 Uris Hall, Ithaca, NY 14853-7601, USA)

Abstract

Capital gains play an essential role in the intertemporal allocation of resources, but they can also fuel self-fulfilling bubbles. The simple case of 2 "identical" capitals is analyzed in an overlapping generations model. The only trajectory in which expectations are realized at every date is the one in which blue machines and red machines have the same price. If ever their prices differ, then there is a "bubble" which must burst in finite time.

Suggested Citation

  • Luís Aguiar-Conraria & Karl Shell, 2005. "Capital Gains: Blue Machines And Red Machines," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 50(spec0), pages 437-447.
    • Handle: RePEc:wsi:serxxx:v:50:y:2005:i:spec0:n:s021759080500213x
    DOI: 10.1142/S021759080500213X
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