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Capital Gains: Blue Machines And Red Machines

  • LUÍS AGUIAR-CONRARIA

    ()

    (Departmento de Economia, Escola de Economia e Gestao, Universidade do Minho, Campus de Gualtar, 4710-57 Braga, Portugal)

  • KARL SHELL

    ()

    (Department of Economics, Cornell University, 402 Uris Hall, Ithaca, NY 14853-7601, USA)

Capital gains play an essential role in the intertemporal allocation of resources, but they can also fuel self-fulfilling bubbles. The simple case of 2 "identical" capitals is analyzed in an overlapping generations model. The only trajectory in which expectations are realized at every date is the one in which blue machines and red machines have the same price. If ever their prices differ, then there is a "bubble" which must burst in finite time.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal The Singapore Economic Review.

Volume (Year): 50 (2005)
Issue (Month): sp ()
Pages: 437-447

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Handle: RePEc:wsi:serxxx:v:50:y:2005:i:sp:p:437-447
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  1. Atkinson, Anthony B, 1969. "The Timescale of Economic Models: How Long Is the Long Run?," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 137-52, April.
  2. Burmeister, Edwin, et al, 1973. "The "Saddlepoint Property" and the Structure of Dynamic Heterogeneous Capital Good Models," Econometrica, Econometric Society, vol. 41(1), pages 79-95, January.
  3. Burmeister, Edwin & Graham, Daniel A, 1974. "Multi-sector Economic Models with Continuous Adaptive Expectations," Review of Economic Studies, Wiley Blackwell, vol. 41(3), pages 323-36, July.
  4. Caton, C & Shell, Karl, 1971. "An Exercise in the Theory of Heterogeneous Capital Accumulation," Review of Economic Studies, Wiley Blackwell, vol. 38(113), pages 13-22, January.
  5. Magill, Michael & Quinzii, Martine, 2003. "Nonshiftable capital, affine price expectations and convergence to the Golden Rule," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 239-272, June.
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