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Rational bubbles and the spirit of capitalism

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  • Zhou, Ge
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    Abstract

    This paper explores the existence of rational bubbles in the pricing of an asset that pays no dividend. I find that when "the spirit of capitalism" is introduced into a growth model, rational bubbles do exist provided that the marginal benefit from holding wealth is nontrivial relative to the marginal utility of consumption as time goes to infinity. I use phase diagrams to discuss the property of the bubbly equilibrium and I use two examples to describe the bubbly equilibrium trajectory explicitly and more intuitively. Moreover, I show that a stochastic bubble, which bursts with an exogenous probability, could exist. This could provide a simple theoretical foundation to explore economic implications of the collapse of bubbles.

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    File URL: http://mpra.ub.uni-muenchen.de/44719/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 33988.

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    Date of creation: Jun 2011
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    Handle: RePEc:pra:mprapa:33988

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    Keywords: bubbles; the spirit of capitalism; growth;

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    1. Willem H. Buiter & Anne C. Sibert, 2004. "Deflationary Bubbles," NBER Working Papers 10642, National Bureau of Economic Research, Inc.
    2. Martin, Alberto & Ventura, Jaume, 2010. "Economic Growth with Bubbles," CEPR Discussion Papers 7770, C.E.P.R. Discussion Papers.
    3. Maurice Obstfeld & Kenneth Rogoff, 1982. "Speculative Hyperinflations in Maximizing Models: Can We Rule Them Out?," NBER Working Papers 0855, National Bureau of Economic Research, Inc.
    4. Diamond, Douglas W., 2006. "Comment on "Bubbles and capital flow volatility: Causes and risk management"," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 55-57, January.
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    7. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May.
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    9. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
    10. John R. Conlon, 2004. "Simple Finite Horizon Bubbles Robust to Higher Order Knowledge," Econometrica, Econometric Society, vol. 72(3), pages 927-936, 05.
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    20. Diba, Behzad T & Grossman, Herschel I, 1987. "On the Inception of Rational Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 697-700, August.
    21. Takashi Kamihigashi, 2008. "The spirit of capitalism, stock market bubbles and output fluctuations," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(1), pages 3-28.
    22. Kocherlakota, N.R., 1990. "Bubbles and Constraints on Debt Accumulation," Working Papers 90-29, University of Iowa, Department of Economics.
    23. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    24. 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.
    25. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 813-36, October.
    26. Gerhard Illing, 2001. "Financial Fragility, Bubbles and Monetary Policy," CESifo Working Paper Series 449, CESifo Group Munich.
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    Cited by:
    1. Zhou, Ge, 2012. "Rational equity bubbles," MPRA Paper 39398, University Library of Munich, Germany.

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