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Capital Gains: Blue Machines and Red Machines


  • Aguiar-Conraria, Luis

    (Cornell U and NIPE, U of Minho)

  • Shell, Karl

    (Cornell U)


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 OG 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.

Suggested Citation

  • Aguiar-Conraria, Luis & Shell, Karl, 2005. "Capital Gains: Blue Machines and Red Machines," Working Papers 05-15, Cornell University, Center for Analytic Economics.
  • Handle: RePEc:ecl:corcae:05-15

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    1. 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.
    2. C. Caton & K. Shell, 1971. "An Exercise in the Theory of Heterogeneous Capital Accumulation," Review of Economic Studies, Oxford University Press, vol. 38(1), pages 13-22.
    3. Edwin Burmeister & Daniel A. Graham, 1974. "Multi-sector Economic Models with Continuous Adaptive Expectations," Review of Economic Studies, Oxford University Press, vol. 41(3), pages 323-336.
    4. A. B. Atkinson, 1969. "The Timescale of Economic Models: How Long is the Long Run?," Review of Economic Studies, Oxford University Press, vol. 36(2), pages 137-152.
    5. Karl Shell & Joseph E. Stiglitz, 1967. "The Allocation of Investment in a Dynamic Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 81(4), pages 592-609.
    6. 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.
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