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Capital gains

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  • Luís Aguiar-Conraria
  • Karl Shell

Abstract

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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  • 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.
  • Handle: RePEc:bla:ijethy:v:2:y:2006:i:3-4:p:331-349
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    References listed on IDEAS

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    1. K. Shell, 1968. "Applications of Pontryagin's Maximum Principle of Economics," Working papers 16, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Grandmont, Jean-Michel, 1993. "Temporary general equilibrium theory," Handbook of Mathematical Economics,in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 19, pages 879-922 Elsevier.
    3. 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.
    4. K. Shell & M. Sidrauski & J. E. Stiglitz, 1969. "Capital Gains, Income, and Saving," Review of Economic Studies, Oxford University Press, vol. 36(1), pages 15-26.
    5. C. Caton & K. Shell, 1971. "An Exercise in the Theory of Heterogeneous Capital Accumulation," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 13-22.
    6. 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.
    7. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
    8. Edwin Burmeister & Daniel A. Graham, 1974. "Multi-sector Economic Models with Continuous Adaptive Expectations," Review of Economic Studies, Oxford University Press, vol. 41(3), pages 323-336.
    9. A. B. Atkinson, 1969. "The Timescale of Economic Models: How Long is the Long Run?," Review of Economic Studies, Oxford University Press, vol. 36(2), pages 137-152.
    10. Grandmont, Jean-Michel & Hildenbrand, Werner, 1974. "Stochastic processes of temporary equilibria," Journal of Mathematical Economics, Elsevier, vol. 1(3), pages 247-277, December.
    11. 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.
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    Cited by:

    1. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2010. "Resurrecting equilibria through cycles in an overlapping generations model of money," Journal of Macroeconomics, Elsevier, pages 515-526.
    2. Kaushik Basu, 2009. "A Marketing Scheme for Making Money off Innocent People: A User’s Manual," Working Papers id:2341, eSocialSciences.
    3. 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.
    4. 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.
    5. 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.
    6. Sangmok Choi & Bruce D. Smith & John H. Boyd, 1996. "Inflation, financial markets and capital formation," Review, Federal Reserve Bank of St. Louis, issue May, pages 9-35.
    7. 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.

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