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Bubble Necessity Theorem

Author

Listed:
  • Tomohiro Hirano
  • Alexis Akira Toda

Abstract

Asset price bubbles are situations where asset prices exceed the fundamental values defined by the present value of dividends. This paper presents a conceptually new perspective: the necessity of bubbles. We establish the bubble necessity theorem in a plausible general class of economic models: with faster long-run economic growth (G) than dividend growth (Gd) and counterfactual long-run autarky interest rate (R) below dividend growth, all equilibria are bubbly with nonnegligible bubble sizes relative to the economy. This bubble necessity condition naturally arises in economies with sufficiently strong savings motives and multiple factors or sectors with uneven productivity growth.

Suggested Citation

  • Tomohiro Hirano & Alexis Akira Toda, 2025. "Bubble Necessity Theorem," Journal of Political Economy, University of Chicago Press, vol. 133(1), pages 111-145.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/732528
    DOI: 10.1086/732528
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    Cited by:

    1. Tomohiro Hirano & Alexis Akira Toda, 2026. "Land, G versus R, and Infinite Debt Rollover," CIGS Working Paper Series 26-002E, The Canon Institute for Global Studies.
    2. Stefano Bosi & Cuong Le Van & Ngoc-Sang Pham, 2025. "To Bubble or Not to Bubble: Asset Price Dynamics and Optimality in OLG Economies," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-05199274, HAL.
    3. repec:ejw:journl:v:22:y:2025:i:1:p:1-17 is not listed on IDEAS
    4. Pham, Ngoc Sang & Le Van, Cuong & Bosi, Stefano, 2025. "To Bubble or Not to Bubble: Asset Price Dynamics and Optimality in OLG Economies," MPRA Paper 125772, University Library of Munich, Germany.
    5. Bonchi, Jacopo & Nisticò, Salvatore, 2024. "Optimal monetary policy and rational asset bubbles," European Economic Review, Elsevier, vol. 170(C).
    6. Han, Jungsuk & Wang, Yenan, 2025. "All that glitters: A theory of multiple bubbles with implications for cryptocurrencies," Journal of Monetary Economics, Elsevier, vol. 152(C).
    7. Ngoc-Sang Pham, 2024. "The relationship between general equilibrium models with infinite-lived agents and overlapping generations models, and some applications," Papers 2411.07674, arXiv.org, revised Jan 2026.
    8. Hirano, Tomohiro & Toda, Alexis Akira, 2024. "Bubble economics," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    9. Clain-Chamosset-Yvrard, Lise & Raurich, Xavier & Seegmuller, Thomas, 2025. "Rational bubbles in portfolios with fundamental value," Mathematical Social Sciences, Elsevier, vol. 138(C).
    10. Toda, Alexis Akira, 2025. "Land bubbles despite non-vanishing rents," Economics Letters, Elsevier, vol. 257(C).
    11. Gómez, Manuel A., 2025. "Factor substitution and economic growth in a Romer-type model with monopolistic competition," Journal of Mathematical Economics, Elsevier, vol. 117(C).

    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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