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The Spirit Of Capitalism And Rational Bubbles

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  • Zhou, Ge

Abstract

This study provides an infinite-horizon model of rational bubbles in a production economy. A bubble can arise when the pursuit of status is modeled explicitly, capturing the notion of “the spirit of capitalism.” Using a parameterized model, I demonstrate the specific conditions for the existence of bubbles and their implications. Bubbles crowd out investment, stimulate consumption, and slow economic growth. I also discuss a stochastic bubble that bursts with an exogenous probability. I show that there could be multiple stochastic bubbly equilibria. Moreover, I suggest that taxing wealth properly can eliminate bubbles and achieve the social optimum.

Suggested Citation

  • Zhou, Ge, 2016. "The Spirit Of Capitalism And Rational Bubbles," Macroeconomic Dynamics, Cambridge University Press, vol. 20(6), pages 1432-1457, September.
    • Handle: RePEc:cup:macdyn:v:20:y:2016:i:06:p:1432-1457_00
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    Cited by:

    1. Shiro Kuwahara, 2018. "When is the Spirit of Capitalism Effective for Economic Development?," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(3), pages 70-82, March.
    2. Clain-Chamosset-Yvrard, Lise, 2021. "Expectation-Driven Asset Price Fluctuations Under The Spirit Of Capitalism Hypothesis: The Role Of Heterogeneity," Macroeconomic Dynamics, Cambridge University Press, vol. 25(2), pages 509-535, March.
    3. Michau, Jean-Baptiste & Ono, Yoshiyasu & Schlegl, Matthias, 2023. "Wealth preference and rational bubbles," European Economic Review, Elsevier, vol. 156(C).
    4. Zaifu Yang & Rong Zhang, 2024. "Consumption, Wealth, Frugality, and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 25(1), pages 31-61, May.
    5. ASAOKA Shintaro, 2020. "Reserve Requirements and Bubbles," Discussion papers 20042, Research Institute of Economy, Trade and Industry (RIETI).
    6. Wang, Gaowang & Zou, Heng-fu, 2020. "Optimal fiscal and monetary policy in economies with capital," MPRA Paper 102753, University Library of Munich, Germany.
    7. Zaifu Yang & Rong Zhang, 2021. "Generalized Cumulative Offer Processes," Discussion Papers 21/08, Department of Economics, University of York.

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