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Capital gains

  • Luís Aguiar-Conraria
  • Karl Shell

Capital gains play an important, positive role in the inter-temporal allocation of resources, but they can also be a source of economic instability. We analyze a simple overlapping-generations economy with two capital goods and irreversible investment. For each vector of initial capital/labor ratios, there is one and only one trajectory on which expectations are realized at every date. If there is any deviation from this trajectory, then there is a bubble which must burst in finite time.

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Article provided by The International Society for Economic Theory in its journal International Journal of Economic Theory.

Volume (Year): 2 (2006)
Issue (Month): 3-4 ()
Pages: 331-349

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Handle: RePEc:bla:ijethy:v:2:y:2006:i:3-4:p:331-349
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  1. Benhabib Jess & Rustichini Aldo, 1994. "Introduction to the Symposium on Growth, Fluctuations, and Sunspots: Confronting the Data," Journal of Economic Theory, Elsevier, vol. 63(1), pages 1-18, June.
  2. 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.
  3. Shell, Karl & Sidrauski, Miguel & Stiglitz, Joseph E, 1969. "Capital Gains, Income, and Saving," Review of Economic Studies, Wiley Blackwell, vol. 36(105), pages 15-26, January.
  4. GRANDMONT, Jean-Michel & HILDENBRAND, Werner, . "Stochastic processes of temporary equilibria," CORE Discussion Papers RP -206, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Caton, C & Shell, Karl, 1971. "An Exercise in the Theory of Heterogeneous Capital Accumulation," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 13-22, January.
  6. Atkinson, Anthony B, 1969. "The Timescale of Economic Models: How Long Is the Long Run?," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 137-52, April.
  7. Grandmont, Jean-Michel, 1977. "Temporary General Equilibrium Theory," Econometrica, Econometric Society, vol. 45(3), pages 535-72, April.
  8. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  9. K. Shell, 1968. "Applications of Pontryagin's Maximum Principle of Economics," Working papers 16, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. 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.
  11. Burmeister, Edwin & Graham, Daniel A, 1974. "Multi-sector Economic Models with Continuous Adaptive Expectations," Review of Economic Studies, Wiley Blackwell, vol. 41(3), pages 323-36, July.
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