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Injecting Rational Bubbles

  • Narayana R. Kocherlakota

This paper proves two theorems about economies with a finite number of infinitely lived agents who trade a complete set of one-period Arrow securities and several infinitely lived securities at each date, subject to short-sales constraints. The first theorem in the paper considers an equilibrium to an economy of this kind. It proves that there exists another economy with perturbed short-sales constraints in which there is an allocation-equivalent equilibrium in which asset prices have a bubble. The second theorem extends to the result to the case in short-sales constraints are endogenously determined in the sense of Alvarez and Jermann [Efficiency, equilibrium, and asset pricing with risk of default, Econometrica 68 (2000) 775-797].

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File URL: http://www.econ.umn.edu/~nkocher/bubble9.pdf
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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 122247000000000905.

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Date of creation: 08 Feb 2006
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Handle: RePEc:cla:levrem:122247000000000905
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  1. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
  2. Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
  3. Hanno Lustig, 2001. "The Market Price of Aggregate Risk and the Wealth Distribution," Finance 0111004, EconWPA, revised 16 Nov 2001.
  4. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  5. Behzad T. Diba & Herschel I. Grossman, 1988. "Rational Inflationary Bubbles," NBER Working Papers 2004, National Bureau of Economic Research, Inc.
  6. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  7. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 865-88, October.
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