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On the interplay between speculative bubbles and productive investment

Author

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  • Xavier Raurich

    () (Universitat de Barcelona)

  • Thomas Seegmuller

    () (Aix-Marseille University)

Abstract

The aim of this paper is to study the interplay between long term productive investments and more short term and liquid speculative ones. A three-period lived overlapping generations model allows us to make this distinction. Agents have two investment decisions. When young, they can invest in productive capital that provides a return during the following two periods. When young or in the middle age, they can also invest in a bubble. Assuming, in accordance with the empirical evidence, that the bubbleless economy is dynamically efficient, the existence of a stationary bubble raises productive investment and production. Indeed, young agents sell short the bubble to increase productive investments, whereas traders at middle age transfer wealth to the old age. We outline that a technological change inducing either a larger return of capital in the short term or a similar increase in the return of capital in both periods raises productive capital, production and the bubble size. This framework also allows us to discuss several economic applications: the effects of both regulation on limited borrowing and fiscal policy on the occurrence of bubbles, the introduction of a probability of market crash and the effect of bubbles on income inequality.

Suggested Citation

  • Xavier Raurich & Thomas Seegmuller, 2016. "On the interplay between speculative bubbles and productive investment," UB Economics Working Papers 2016/352, Universitat de Barcelona, Facultat d'Economia i Empresa, UB Economics.
  • Handle: RePEc:ewp:wpaper:352web
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    References listed on IDEAS

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    Cited by:

    1. Lise Clain-Chamosset-Yvrard & Thomas Seegmuller, 2018. "Bubble on real estate: The role of altruism and fiscal policy," Working Papers halshs-01885932, HAL.
    2. Lise Clain-Chamosset-Yvrard & Thomas Seegmuller, 2018. "Bubble on real estate: The role of altruism and fiscal policy," Working Papers 1820, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.

    More about this item

    Keywords

    Bubble; Efficiency; Vintage capital; Short sellers; Overlapping generations.;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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