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Temporary bubbles in an economy with under-accumulation

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  • MICHEL, Philippe
  • WIGNIOLLE, Bertrand

Abstract

This 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 Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2000061.

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Date of creation: 00 Dec 2000
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Handle: RePEc:cor:louvco:2000061

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Keywords: overlapping generations model; bubbles; cash-in-advance constraint.;

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  1. Crettez, Bertrand & Michel, Philippe & Wigniolle, Bertrand, 1999. "Cash-in-Advance Constraints in the Diamond Overlapping Generations Model: Neutrality and Optimality of Monetary Policies," Oxford Economic Papers, Oxford University Press, vol. 51(3), pages 431-52, July.
  2. Frank Hahn & Robert Solow, 1997. "A Critical Essay on Modern Macroeconomic Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258154x, December.
  3. Champ,Bruce & Freeman,Scott & Haslag,Joseph, 2011. "Modeling Monetary Economies," Cambridge Books, Cambridge University Press, number 9780521177009, October.
  4. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  5. 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.
  6. Champ, Bruce & Freeman, Scott, 1990. "Money, Output, and the Nominal National Debt," American Economic Review, American Economic Association, vol. 80(3), pages 390-97, June.
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