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Injecting Rational Bubbles

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  • Narayana R. Kocherlakota

Abstract

This paper proves two theorems about economies with a finite number of infinitely lived agents who trade a complete set of one-period Arrow securities and several infinitely lived securities at each date, subject to short-sales constraints. The first theorem in the paper considers an equilibrium to an economy of this kind. It proves that there exists another economy with perturbed short-sales constraints in which there is an allocation-equivalent equilibrium in which asset prices have a bubble. The second theorem extends to the result to the case in short-sales constraints are endogenously determined in the sense of Alvarez and Jermann [Efficiency, equilibrium, and asset pricing with risk of default, Econometrica 68 (2000) 775-797].

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000905.

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Date of creation: 08 Feb 2006
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Handle: RePEc:cla:levrem:122247000000000905

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References

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  1. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  2. Behzad T. Diba & Herschel I. Grossman, 1988. "Rational Inflationary Bubbles," NBER Working Papers 2004, National Bureau of Economic Research, Inc.
  3. Hanno Lustig, 2001. "The Market Price of Aggregate Risk and the Wealth Distribution," Finance 0111004, EconWPA, revised 16 Nov 2001.
  4. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  5. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
  6. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
  7. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
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Citations

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Cited by:
  1. Kunieda, Takuma, 2008. "Asset bubbles and borrowing constraints," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 112-131, January.
  2. Kocherlakota, Narayana & Wright, Randall, 2008. "Introduction to monetary and macro economics," Journal of Economic Theory, Elsevier, vol. 142(1), pages 1-4, September.
  3. Blommestein, Hans J. & Eijffinger, Sylvester C W & Qian, Zongxin, 2011. "A Dynamic General Equilibrium Analysis of Monetary Policy Rules, Adverse Selection and Long-Run Financial Risk," CEPR Discussion Papers 8652, C.E.P.R. Discussion Papers.
  4. Gaetano Bloise & Pietro Reichlin & Mario Tirelli, 2009. "Indeterminacy Of Competitive Equilibrium With Risk Of Default," Levine's Working Paper Archive 814577000000000313, David K. Levine.
  5. Jan Werner, 2012. "Rational Asset Pricing Bubbles Revisited," 2012 Meeting Papers 1165, Society for Economic Dynamics.
  6. Gaetano Bloise & Pietro Reichlin & Mario Tirelli, 2013. "Fragility of Competitive Equilibrium with Risk of Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 271-295, April.
  7. Jürgen Eichberger & Klaus Rheinberger & Martin Summer, 2014. "Credit Risk in General Equilibrium," CESifo Working Paper Series 4602, CESifo Group Munich.
  8. Stefano Giglio & Tiago Severo, 2011. "Intangible Capital, Relative Asset Shortages and Bubbles," Levine's Working Paper Archive 786969000000000121, David K. Levine.
  9. Araujo, Aloisio & Novinski, Rodrigo & Páscoa, Mário R., 2011. "General equilibrium, wariness and efficient bubbles," Journal of Economic Theory, Elsevier, vol. 146(3), pages 785-811, May.
  10. Pengfei Wang & Jianjun Miao, 2012. "Sectoral Bubbles and Endogenous Growth," 2012 Meeting Papers 227, Society for Economic Dynamics.
  11. Narayana Kocherlakota, 2007. "Money and Bonds: An Equivalence Theorem," Levine's Bibliography 843644000000000161, UCLA Department of Economics.
  12. Bejan, Camelia & Bidian, Florin, 2010. "Limited enforcement, bubbles and trading in incomplete markets," MPRA Paper 36819, University Library of Munich, Germany, revised 20 Feb 2012.
  13. Blommestein, H.J. & Eijffinger, S.C.W. & Qian, Z., 2011. "Monetary Policy Rules, Adverse Selection and Long-Run Financial Risk," Discussion Paper 2011-121, Tilburg University, Center for Economic Research.

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