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Capital Gains

Author

Listed:
  • Aguiar-Conraria, Luis

    (NIPE, U of Minho)

  • Shell, Karl

    (Cornell U)

Abstract

Capital gains play an important, positive role in the inter-temporal allocation of resources, but they can also be a source of economic instability. We analyze a simple overlapping-generations economy with two capital goods and irreversible investment. For each vector of initial capital/labor ratios, there is one and only one trajectory on which expectations are realized at every date. If there is any deviation from this trajectory, then there is a bubble which must burst in finite time.

Suggested Citation

  • Aguiar-Conraria, Luis & Shell, Karl, 2006. "Capital Gains," Working Papers 06-02, Cornell University, Center for Analytic Economics.
    • Handle: RePEc:ecl:corcae:06-02
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    References listed on IDEAS

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    1. K. Shell, 1968. "Applications of Pontryagin's Maximum Principle of Economics," Working papers 16, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
    3. Edwin Burmeister & Daniel A. Graham, 1974. "Multi-sector Economic Models with Continuous Adaptive Expectations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(3), pages 323-336.
    4. C. Caton & K. Shell, 1971. "An Exercise in the Theory of Heterogeneous Capital Accumulation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(1), pages 13-22.
    5. A. B. Atkinson, 1971. "The Timescale of Economic Model How Long is the Long Run?," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 19, pages 248-263, Palgrave Macmillan.
    6. K. Shell & M. Sidrauski & J. E. Stiglitz, 1969. "Capital Gains, Income, and Saving," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(1), pages 15-26.
    7. Jean-Michel Grandmont, 1974. "On the Short-Run Equilibrium in a Monetary Economy," International Economic Association Series, in: Jacques H. Drèze (ed.), Allocation under Uncertainty: Equilibrium and Optimality, chapter 12, pages 213-228, Palgrave Macmillan.
    8. 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.
    9. Benhabib Jess & Rustichini Aldo, 1994. "Introduction to the Symposium on Growth, Fluctuations, and Sunspots: Confronting the Data," Journal of Economic Theory, Elsevier, vol. 63(1), pages 1-18, June.
    10. Luís Aguiar‐Conraria & Karl Shell, 2006. "Capital gains," International Journal of Economic Theory, The International Society for Economic Theory, vol. 2(3‐4), pages 331-349, September.
    11. Grandmont, Jean-Michel, 1993. "Temporary general equilibrium theory," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 19, pages 879-922, Elsevier.
    12. Grandmont, Jean-Michel & Hildenbrand, Werner, 1974. "Stochastic processes of temporary equilibria," Journal of Mathematical Economics, Elsevier, vol. 1(3), pages 247-277, December.
    13. 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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    Cited by:

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    2. Richard C. Barnett & Joydeep Bhattacharya & Helle Bunzel, 2007. "Resurrecting Equilibria Through Cycles," Economics Working Papers 2007-12, Department of Economics and Business Economics, Aarhus University.
    3. Luís Aguiar‐Conraria & Karl Shell, 2006. "Capital gains," International Journal of Economic Theory, The International Society for Economic Theory, vol. 2(3‐4), pages 331-349, September.
    4. Kaushik Basu, 2009. "A Marketing Scheme for Making Money off Innocent People: A User’s Manual," Working Papers id:2341, eSocialSciences.
    5. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2010. "Resurrecting equilibria through cycles in an overlapping generations model of money," Journal of Macroeconomics, Elsevier, vol. 32(2), pages 515-526, June.
    6. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2007. "Minimum Consumption Requirements and Cycles in an Overlapping Generations Model of Money," Staff General Research Papers Archive 12834, Iowa State University, Department of Economics.
    7. John H. Boyd & Sangmok Choi & Bruce Smith, 1996. "Inflation, financial markets and capital formation," Proceedings, Federal Reserve Bank of St. Louis, vol. 78(May), pages 9-35.

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