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Capital gains

Author

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  • Luís Aguiar‐Conraria
  • Karl Shell

Abstract

We analyze a simple overlapping‐generations model with two capital goods. The dynamical system is defined by savings behavior and short‐run perfect‐foresight asset‐market clearing. Because lifetimes are finite, there is no transversality condition. If there is a bubble in asset pricing, it will burst in finite time: expectations will eventually be frustrated, but this might take several generations. This raises the question of whether (infinite) long‐run perfect foresight is a reasonable assumption for overlapping‐generations economies and, hence, whether bursting bubbles can occur in equilibrium.

Suggested Citation

  • Luís Aguiar‐Conraria & Karl Shell, 2006. "Capital gains," International Journal of Economic Theory, The International Society for Economic Theory, vol. 2(3‐4), pages 331-349, September.
    • Handle: RePEc:bla:ijethy:v:2:y:2006:i:3-4:p:331-349
    DOI: 10.1111/j.1742-7363.2006.0039.x
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    Cited by:

    1. Kaushik Basu, 2009. "A Marketing Scheme for Making Money off Innocent People: A User’s Manual," Working Papers id:2341, eSocialSciences.
    2. Roger Haefen, 2008. "Latent Consideration Sets and Continuous Demand Systems," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(3), pages 363-379, November.
    3. Richard C. Barnett & Joydeep Bhattacharya & Helle Bunzel, 2007. "Resurrecting Equilibria Through Cycles," Economics Working Papers 2007-12, Department of Economics and Business Economics, Aarhus University.
    4. Luís Aguiar‐Conraria & Karl Shell, 2006. "Capital gains," International Journal of Economic Theory, The International Society for Economic Theory, vol. 2(3‐4), pages 331-349, September.
    5. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2010. "Resurrecting equilibria through cycles in an overlapping generations model of money," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 515-526, June.
    6. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2007. "Minimum Consumption Requirements and Cycles in an Overlapping Generations Model of Money," Staff General Research Papers Archive 12834, Iowa State University, Department of Economics.
    7. John H. Boyd & Sangmok Choi & Bruce Smith, 1996. "Inflation, financial markets and capital formation," Proceedings, Federal Reserve Bank of St. Louis, vol. 78(May), pages 9-35.

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