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The spirit of capitalism, stock market bubbles and output fluctuations

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  • Takashi Kamihigashi

Abstract

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 can 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.

Suggested Citation

  • 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, March.
  • Handle: RePEc:bla:ijethy:v:4:y:2008:i:1:p:3-28
    DOI: 10.1111/j.1742-7363.2007.00066.x
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    File URL: https://doi.org/10.1111/j.1742-7363.2007.00066.x
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    Cited by:

    1. Clain-Chamosset-Yvrard Lise & Seegmuller Thomas, 2019. "Bubble on real estate: the role of altruism and fiscal policy," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 23(4), pages 1-18, September.
    2. Raurich, Xavier & Seegmuller, Thomas, 2019. "On the interplay between speculative bubbles and productive investment," European Economic Review, Elsevier, vol. 111(C), pages 400-420.
    3. Melindi-Ghidi, Paolo & Seegmuller, Thomas, 2019. "The love for children hypothesis and the multiplicity of fertility rates," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 89-100.
    4. Kamihigashi, Takashi, 2018. "A Simple optimality-based no-bubble theorem for deterministic sequential economies with strictly monotone preferences," Mathematical Social Sciences, Elsevier, vol. 91(C), pages 36-41.
    5. Xavier Raurich & Thomas Seegmuller, 2017. "Income Distribution by Age Group and Productive Bubbles," AMSE Working Papers 1740, Aix-Marseille School of Economics, France.
    6. Clain-Chamosset-Yvrard, Lise & Kamihigashi, Takashi, 2017. "International transmission of bubble crashes in a two-country overlapping generations model," Journal of Mathematical Economics, Elsevier, vol. 68(C), pages 115-126.
    7. Zhou, Ge, 2011. "Rational bubbles and the spirit of capitalism," MPRA Paper 33988, University Library of Munich, Germany.
    8. Stefano Bosi & Thomas Seegmuller, 2013. "Rational bubbles and expectation-driven fluctuations," International Journal of Economic Theory, The International Society for Economic Theory, vol. 9(1), pages 69-83, March.
    9. Clain-Chamosset-Yvrard, Lise & Seegmuller, Thomas, 2015. "Rational bubbles and macroeconomic fluctuations: The (de-)stabilizing role of monetary policy," Mathematical Social Sciences, Elsevier, vol. 75(C), pages 1-15.
    10. Marco Airaudo, 2017. "Complex stock price dynamics under Max Weber’s spirit of capitalism hypothesis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(1), pages 47-73, June.
    11. Ariane Szafarz, 2015. "Market Efficiency and Crises:Don’t Throw the Baby out with the Bathwater," Bankers, Markets & Investors, ESKA Publishing, issue 139, pages 20-26, November-.
    12. Lise Claini-Chamosset-Yvrard & Takashi Kamihigashi, 2015. "International Transmission of Bubble Crashes: Stationary Sunspot Equilibria in a Two-Country Overlapping Generations Model," Discussion Paper Series DP2015-21, Research Institute for Economics & Business Administration, Kobe University.
    13. Mesly, Olivier & Chkir, Imed & Racicot, François-Éric, 2019. "Predatory cells and puzzling financial crises: Are toxic products good for the financial markets?," Economic Modelling, Elsevier, vol. 78(C), pages 11-31.
    14. Ha-Huy, Thai & Tran, Nhat-Thien, 2019. "A simple characterization for sustained growth," MPRA Paper 94079, University Library of Munich, Germany.
    15. Lise Clain-Chamosset-Yvrard & Takashi Kamihigashi, 2015. "International Transmission of Bubble Crashes in a Two-Country Overlapping Generations," Discussion Paper Series DP2015-43, Research Institute for Economics & Business Administration, Kobe University.
    16. Zhou, Ge, 2012. "Rational equity bubbles," MPRA Paper 39398, University Library of Munich, Germany.
    17. Nakamoto, Yasuhiro, 2009. "Jealousy and underconsumption in a one-sector model with wealth preference," Journal of Economic Dynamics and Control, Elsevier, vol. 33(12), pages 2015-2029, December.
    18. Ha-Huy, Thai & Tran, Nhat-Thien, 2019. "A simple characterization for sustained growth," MPRA Paper 94061, University Library of Munich, Germany.
    19. Melindi-Ghidi, Paolo & Seegmuller, Thomas, 2019. "The love for children hypothesis and the multiplicity of fertility rates," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 89-100.

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