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Bubbles and constraints on debt accumulation

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  • Kocherlakota, Narayana R.

Abstract

It is commonly thought (Tirole, Econometrica50 (1982), 1163–1182) that bubbles cannot occur in deterministic sequential market economies with a finite number of infinitely lived agents. This paper shows that the constraint on debt accumulation which make possible the existence of equilibrium can cause bubbles. If agents face a wealth constraint, bubbles can exist if and only if the assest is in zero net supply. If agents face exogenous short sales constraints, bubbles can exists if and only if some agent's endowment grows at a rate larger than the rate of return and the short sales constraint binds that agent infinitely often.

Suggested Citation

  • Kocherlakota, Narayana R., 1992. "Bubbles and constraints on debt accumulation," Journal of Economic Theory, Elsevier, vol. 57(1), pages 245-256.
  • Handle: RePEc:eee:jetheo:v:57:y:1992:i:1:p:245-256
    DOI: 10.1016/S0022-0531(05)80052-3
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    References listed on IDEAS

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    1. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-1011, Sept.-Oct.
    2. Kocherlakota, Narayana R., 1992. "Bubbles and constraints on debt accumulation," Journal of Economic Theory, Elsevier, vol. 57(1), pages 245-256.
    3. Gilles, C. & Leroy, S.F., 1989. "Bubbles And Charges," University of California at Santa Barbara, Economics Working Paper Series 29-89, Department of Economics, UC Santa Barbara.
    4. Wright, Randall D., 1987. "Market structure and competitive equilibrium in dynamic economic models," Journal of Economic Theory, Elsevier, vol. 41(1), pages 189-201, February.
    5. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
    6. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
    7. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    8. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
    9. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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