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Capital Gains: Blue Machines and Red Machines

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  • Aguiar-Conraria, Luis

    (Cornell U and NIPE, U of Minho)

  • Shell, Karl

    (Cornell U)

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 OG 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.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 05-15.

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Date of creation: Aug 2005
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Handle: RePEc:ecl:corcae:05-15

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  1. Magill, Michael & Quinzii, Martine, 2003. "Nonshiftable capital, affine price expectations and convergence to the Golden Rule," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 239-272, June.
  2. Atkinson, Anthony B, 1969. "The Timescale of Economic Models: How Long Is the Long Run?," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 36(106), pages 137-52, April.
  3. Burmeister, Edwin & Graham, Daniel A, 1974. "Multi-sector Economic Models with Continuous Adaptive Expectations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 41(3), pages 323-36, July.
  4. Caton, C & Shell, Karl, 1971. "An Exercise in the Theory of Heterogeneous Capital Accumulation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(113), pages 13-22, January.
  5. Burmeister, Edwin, et al, 1973. "The "Saddlepoint Property" and the Structure of Dynamic Heterogeneous Capital Good Models," Econometrica, Econometric Society, Econometric Society, vol. 41(1), pages 79-95, January.
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