How Bubbles are born and Burst in the Foreign Exchanges
Diba and Grossman (1987) demonstrated that the conception of a rational bubble as defined by Blanchard and Watson (1982) is impossible. The present paper shows that this impossibility theorem also applies under various imperfections and irrationalities. These are: sticky goods prices, believing in a wrong model, heterogenous expectations and learning processes. It is suggested that for any bubble to get started out of a non-bubble equilibrium individuals would have to form expectations which contradict the forecasts produced by their own personal and possibly completely misconceived model. Such inconsistent expectations would be in blatant conflict with the notion of economic man.
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Volume (Year): 218 (1999)
Issue (Month): 3+4 (March)
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