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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. ASAOKA Shintaro, 2020. "Reserve Requirements and Bubbles," Discussion papers 20042, Research Institute of Economy, Trade and Industry (RIETI).
    5. Wang, Gaowang & Zou, Heng-fu, 2020. "Optimal fiscal and monetary policy in economies with capital," MPRA Paper 102753, University Library of Munich, Germany.
    6. Zaifu Yang & Rong Zhang, 2021. "Generalized Cumulative Offer Processes," Discussion Papers 21/08, Department of Economics, University of York.

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