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On Rational Exuberance

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  • Stefano Bosi

    ()
    (EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université Lille I - Sciences et technologies - Université Lille II - Droit et santé - Université Lille III - Sciences humaines et sociales - PRES Université Lille Nord de France, EPEE - Université d'Evry-Val d'Essonne)

  • Thomas Seegmuller

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

Abstract

In his seminal contribution, Tirole (1985) shows that an overlapping generations economy may monotonically converges to a steady state with a positive rational bubble, characterized by the dynamically efficient golden rule. The issue we address is whether this monotonic convergence to an efficient long-run equilibrium may fail, while the economy experiences persistent endogenous fluctuations around the golden rule. Our explanation leads on the features of the credit market. We consider a simple overlapping generations model with three assets : money, capital and a pure bubble (bonds). Collateral matters because increasing his portfolio in capital and bubble, the household reduces the share of his consumption paid by cash. From a positive point of view, we show that the bubbly steady state can be locally indeterminate under arbitrarily small credit market imperfections and, thereby, persistent expectation-driven fluctuations of equilibria with (rational) bubbles can arise. From a normative point of view, monetary policies that are not too expansive, are recommended in order to rule out the occurence of sunspot fluctuations and enhance the welfare evaluated at the steady state.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00367689.

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Date of creation: Jan 2009
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Handle: RePEc:hal:cesptp:halshs-00367689

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Keywords: Bubbles; collaterals; indeterminacy; cash-in-advance constraint; overlapping generations.;

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References

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  1. Bosi, Stefano & Magris, Francesco, 2003. "Indeterminacy and endogenous fluctuations with arbitrarily small liquidity constraint," Research in Economics, Elsevier, Elsevier, vol. 57(1), pages 39-51, March.
  2. GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 27-59, October.
  4. de la Croix,David & Michel,Philippe, 2002. "A Theory of Economic Growth," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521001151.
  5. Azariadis, Costas & Reichlin, Pietro, 1996. "Increasing returns and crowding out," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 20(5), pages 847-877, May.
  6. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, Econometric Society, vol. 53(6), pages 1499-1528, November.
  7. Michel, Philippe & Wigniolle, Bertrand, 2003. "Temporary bubbles," Journal of Economic Theory, Elsevier, Elsevier, vol. 112(1), pages 173-183, September.
  8. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 555-74, May.
  9. Philippe Michel & Bertrand Wigniolle, 2005. "Cash-in-advance constraints, bubbles and monetary policy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers), HAL halshs-00268861, HAL.
  10. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 50(5), pages 1163-81, September.
  11. Robert J. Shiller, 1980. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," NBER Working Papers 0456, National Bureau of Economic Research, Inc.
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Cited by:
  1. Wigniolle, B., 2014. "Optimism, pessimism and financial bubbles," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 41(C), pages 188-208.
  2. Lise Clain-Chamosset-Yvrard & Thomas Seegmuller, 2013. "The Stabilizing Virtues of Fiscal vs. Monetary Policy on Endogenous Bubble Fluctuations," Working Papers, HAL halshs-00854536, HAL.
  3. Lise Clain-Chamosset-Yvrard & Thomas Seegmuller, 2012. "Rational Bubbles and Macroeconomic Fluctuations. The(De-)Stabilizing Role of Monetary Policy," AMSE Working Papers 1207, Aix-Marseille School of Economics, Marseille, France, revised 23 Mar 2012.
  4. Barbar, Riham & Bosi, Stefano, 2010. "Collaterals and macroeconomic volatility," Research in Economics, Elsevier, Elsevier, vol. 64(3), pages 146-161, September.
  5. repec:hal:journl:halshs-00673892 is not listed on IDEAS
  6. repec:hal:cesptp:halshs-00673892 is not listed on IDEAS
  7. Thomas Seegmuller & Lise Clain-Chamosset-Yvrard, 2013. "The Stabilizing Virtues of Fiscal vs. Monetary Policy on Endogenous Bubble Fluctuations," AMSE Working Papers 1343, Aix-Marseille School of Economics, Marseille, France, revised 17 Aug 2013.

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