Temporary bubbles in an economy with under-accumulation
AbstractThis paper studies the equilibrium dynamics of an overlapping generations model with capital, money and cash-in-advance constraints. At each date the economy can experience two different regimes. In the first one the cash-inadvance constraint is binding and money is a dominated asset. In the second one, the constraint is strictly satisfied and money has the same return as capital. When the second regime holds on some finite interval, we say that the economy experiences a temporary bubble. We prove that temporary bubbles can exist in an economy which would experience under accumulation without money. We also show, in an example, that cyclical bubbles and sunspot equilibria may occur. Finally, we prove that money creation has the power to eliminate bubbles.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2000061.
Date of creation: 00 Dec 2000
Date of revision:
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overlapping generations model; bubbles; cash-in-advance constraint.;
Other versions of this item:
- Michel, P. & Wigniolle, B., 2000. "Temporary Bubbles in an Economy with Under-Accumulation," Papiers d'Economie MathÃÂ©matique et Applications 2000.91, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- D9 - Microeconomics - - Intertemporal Choice
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- G1 - Financial Economics - - General Financial Markets
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Modeling Monetary Economies,"
Cambridge University Press, number 9781107003491.
- Crettez, Bertrand & Michel, Philippe & Wigniolle, Bertrand, 1999.
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Oxford Economic Papers,
Oxford University Press, vol. 51(3), pages 431-52, July.
- CRETTEZ, Bertrand & MICHEL, Philippe & WIGNIOLLE, Bertrand, 1998. "Cash-in-advance constraints in the diamond overlapping generations model: neutrality and optimality of monetary policies," CORE Discussion Papers 1998005, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Crettez, B. & Michel, P. & Wigniolle, B., 1997. "Cash-in-Advance Constraints in the Diamond Overlapping Generations Model: Neutrality and Optimality of Monetary Policies," Papiers d'Economie MathÃÂ©matique et Applications 97.52, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
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- Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
- Gahvari, Firouz, 1988. "Lump-sum taxation and the superneutrality and optimum quantity of money in life cycle growth models," Journal of Public Economics, Elsevier, vol. 36(3), pages 339-367, August.
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