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The spirit of capitalism, stock market bubbles and output fluctuations

  • Takashi Kamihigashi

This paper presents a representative agent model in which stock market bubbles cause output fluctuations. Assuming that utility depends directly on wealth, we show that stock market bubbles arise if the marginal utility of wealth does not decline to zero as wealth goes to infinity. Bubbles may affect output positively or negative depending on whether the production function exhibits increasing or decreasing returns to scale. In sunspot equilibria, the bursting of a bubble is followed by a sharp decline in output one period later. Various numerical examples are given to illustrate the behavior of stochastic bubbles and the relationship between bubbles and output.

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

Volume (Year): 4 (2008)
Issue (Month): 1 ()
Pages: 3-28

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Handle: RePEc:bla:ijethy:v:4:y:2008:i:1:p:3-28
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  1. Hassapis, Christis & Kalyvitis, Sarantis, 2002. "Investigating the links between growth and real stock price changes with empirical evidence from the G-7 economies," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 543-575.
  2. Takashi Kamihigashi, 2003. "Almost sure convergence to zero in stochastic growth models," Discussion Paper Series 170, Research Institute for Economics & Business Administration, Kobe University, revised May 2005.
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  13. Futagami, Koichi & Shibata, Akihisa, 1999. "Welfare effects of bubbles in an endogenous growth model," Research in Economics, Elsevier, vol. 53(4), pages 381-403, December.
  14. Kamihigashi, Takashi, 2001. "Necessity of Transversality Conditions for Infinite Horizon Problems," Econometrica, Econometric Society, vol. 69(4), pages 995-1012, July.
  15. Takashi Kamihigashi, 1998. "Uniqueness of asset prices in an exchange economy with unbounded utility," Economic Theory, Springer, vol. 12(1), pages 103-122.
  16. 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.
  17. Chang, Wen-ya & Tsai, Hsueh-fang & Lai, Ching-chong, 2004. "Taxation, growth, and the spirit of capitalism," European Journal of Political Economy, Elsevier, vol. 20(4), pages 1011-1025, November.
  18. Obstfeld, Maurice & Rogoff, Kenneth, 1986. "Ruling out divergent speculative bubbles," Journal of Monetary Economics, Elsevier, vol. 17(3), pages 349-362, May.
  19. Binswanger, Mathias, 2004. "Stock returns and real activity in the G-7 countries: did the relationship change during the 1980s?," The Quarterly Review of Economics and Finance, Elsevier, vol. 44(2), pages 237-252, May.
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