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Rational Inflationary Bubbles

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Author Info
Behzad T. Diba
Herschel I. Grossman

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Abstract

This paper analyzes the possible inception of rational inflationary bubbles under the assumption that the empirically relevant environment precludes the existence of rational deflationary bubbles. The analysis shows that if a rational inflationary bubble exists, then it must have started on the date of initial issuance of the fiat money. Moreover, the existence of a rational inflationary bubble would imply that, prior to the initial issuance of the fiat money, agents who anticipated its introduction expected a rational inflationary bubble to occur. The analysis also shows that once a rational inflationary bubble bursts it cannot restart. The analysis, however, does not preclude the existence of a rational inflationary bubble that shrinks periodically, but never bursts. The limitations on the inception and existence of rational inflationary bubbles also apply to rational exchange-rate bubbles.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2004.

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Date of creation: Sep 1988
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Handle: RePEc:nbr:nberwo:2004

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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.:
  1. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September. [Downloadable!] (restricted)
  2. Meese, Richard A, 1986. "Testing for Bubbles in Exchange Markets: A Case of Sparkling Rates?," Journal of Political Economy, University of Chicago Press, vol. 94(2), pages 345-73, April. [Downloadable!] (restricted)
  3. Obstfeld, Maurice & Rogoff, Kenneth, 1983. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 675-87, August. [Downloadable!] (restricted)
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  4. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-70, August. [Downloadable!] (restricted)
  5. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389. [Downloadable!] (restricted)
  6. Olivier J. Blanchard & Mark W. Watson, 1983. "Bubbles, Rational Expectations and Financial Markets," NBER Working Papers 0945, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Weil, Philippe, 1987. "Confidence and the Real Value of Money in an Overlapping Generations Economy," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 1-22, February. [Downloadable!] (restricted)
  8. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May. [Downloadable!] (restricted)
  9. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November. [Downloadable!] (restricted)
  10. Singleton, Kenneth, 1987. "Speculation and the volatility of foreign currency exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 9-56, January. [Downloadable!] (restricted)
  11. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April. [Downloadable!] (restricted)
  12. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October. [Downloadable!] (restricted)
  13. Gray, Jo Anna, 1984. "Dynamic Instability in Rational Expectations Models: An Attempt to Clarify," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 93-122, February. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Robert P. Flood & Robert J. Hodrick, 1989. "Testable Implications of Indeterminacies in Models with Rational Expectations," NBER Working Papers 2903, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Dimitris Georgoutsos & George Kouretas, 2000. "A Multivariate I(2) Cointegration Analysis Of German Hyperinflation," Working Papers 0001, University of Crete, Department of Economics, revised 00 Jul 2001. [Downloadable!]
    Other versions:
  3. Nielsen, Bent, 2008. "On the Explosive Nature of Hyper-Inflation Data," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 2(21), pages 1-29. [Downloadable!]
    Other versions:
  4. Alessandra Pelloni, 1993. "Long-run consequences of finite exchange rate bubbles," Open Economies Review, Springer, vol. 4(1), pages 5-26, March. [Downloadable!] (restricted)
  5. Narayana R. Kocherlakota, 2006. "Injecting Rational Bubbles," Levine's Bibliography 122247000000000905, UCLA Department of Economics. [Downloadable!]
    Other versions:
  6. Behzad T. Diba & Herschel I. Grossman, 1988. "On the Inception of Rational Bubbles in Stock Prices," NBER Working Papers 1990, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Willem H. Buiter & Paolo A. Pesenti, 1990. "Rational Speculative Bubbles in an Exchange Rate Target Zone," NBER Working Papers 3467, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Franklin Allen & Gary Gorton, 1991. "Rational Finite Bubbles," NBER Working Papers 3707, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. Kiminori Matsuyama, 1989. "Serial Correlation of Sunspot Equilibria (Rational Bubbles) in Two Popular Models of Monetary Economies," Discussion Papers 827, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  10. Herschel I. Grossman, 1992. "Monetary Economics: A Review Essay," NBER Working Papers 3686, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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