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Capital Gains: Blue Machines and Red Machines

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Author Info
Aguiar-Conraria, Luis (Cornell U and NIPE, U of Minho)
Shell, Karl (Cornell U)

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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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File URL: http://www.arts.cornell.edu/econ/CAE/05-15.pdf
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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. Atkinson, Anthony B, 1969. "The Timescale of Economic Models: How Long Is the Long Run?," Review of Economic Studies, Blackwell Publishing, vol. 36(106), pages 137-52, April. [Downloadable!] (restricted)
  2. Burmeister, Edwin, et al, 1973. "The "Saddlepoint Property" and the Structure of Dynamic Heterogeneous Capital Good Models," Econometrica, Econometric Society, vol. 41(1), pages 79-95, January. [Downloadable!] (restricted)
  3. Caton, C & Shell, Karl, 1971. "An Exercise in the Theory of Heterogeneous Capital Accumulation," Review of Economic Studies, Blackwell Publishing, vol. 38(113), pages 13-22, January. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
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