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The Spirit of Capitalism, Stock Market Bubbles, and Output Fluctuations

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  • Takashi Kamihigashi

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

This paper presents a representative agent model in which stock market bubbles cause output fluctuations. Assuming that utility depends directly on wealth, we show that stock market bubbles arise if the marginal utility of wealth does not decline to zero as wealth goes to infinity. Bubbles may affect output positively or negative depending on whether the production function exhibits increasing or decreasing returns to scale. In sunspot equilibria, the bursting of a bubble is followed by a sharp decline in output one period later. Various numerical examples are given to illustrate the behavior of stochastic bubbles and the relationship between bubbles and output.

Suggested Citation

  • Takashi Kamihigashi, 2007. "The Spirit of Capitalism, Stock Market Bubbles, and Output Fluctuations," Discussion Paper Series 205, Research Institute for Economics & Business Administration, Kobe University, revised Oct 2007.
    • Handle: RePEc:kob:dpaper:205
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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp205.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Spirit of capitalism; Stock market bubbles; Output fluctuations; Wealth in utility; Sunspot equilibria;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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