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A Simple No-Bubble Theorem

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  • Takashi Kamihigashi

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

Abstract

This paper establishes a simple no-bubble theorem that applies to a wide range of deterministic models with in nitely lived consumers. Our model assumes only a sequential budget constraint and strictly monotone preferences. In this general setup, we show that asset bubbles are impossible if a consumer can reduce his asset holdings permanently. This is a substantial generalization of the result of Kocherlakota (1992) on asset bubbles and short-sales constraints.

Suggested Citation

  • Takashi Kamihigashi, 2015. "A Simple No-Bubble Theorem," Discussion Paper Series DP2015-03, Research Institute for Economics & Business Administration, Kobe University.
  • Handle: RePEc:kob:dpaper:dp2015-03
    as

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    File URL: http://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2015-03.pdf
    File Function: First version, 2015
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    References listed on IDEAS

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    1. Stefano Bosi & Cuong Le Van & Ngoc-Sang Pham, 2014. "Intertemporal equilibrium with production: bubbles and efficiency," Documents de travail du Centre d'Economie de la Sorbonne 14043, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    2. Montrucchio, Luigi & Privileggi, Fabio, 2001. "On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type," Journal of Economic Theory, Elsevier, vol. 101(1), pages 158-188, November.
    3. Kamihigashi, Takashi, 2005. "Necessity of the transversality condition for stochastic models with bounded or CRRA utility," Journal of Economic Dynamics and Control, Elsevier, vol. 29(8), pages 1313-1329, August.
    4. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
    5. Kevin X.D. Huang & Jan Werner, 2000. "Asset price bubbles in Arrow-Debreu and sequential equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 15(2), pages 253-278.
    6. Kocherlakota, Narayana R., 1992. "Bubbles and constraints on debt accumulation," Journal of Economic Theory, Elsevier, vol. 57(1), pages 245-256.
    7. Miao, Jianjun, 2014. "Introduction to economic theory of bubbles," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 130-136.
    8. Takashi Kamihigashi, 2008. "The spirit of capitalism, stock market bubbles and output fluctuations," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(1), pages 3-28.
    9. Takashi Kamihigashi, 2011. "Recurrent Bubbles," The Japanese Economic Review, Japanese Economic Association, vol. 62(1), pages 27-62, March.
    10. Kamihigashi, Takashi, 2003. "Necessity of transversality conditions for stochastic problems," Journal of Economic Theory, Elsevier, vol. 109(1), pages 140-149, March.
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    12. Kamihigashi, Takashi, 2001. "Necessity of Transversality Conditions for Infinite Horizon Problems," Econometrica, Econometric Society, vol. 69(4), pages 995-1012, July.
    13. Takashi Kamihigashi, 2003. "Necessity of the Transversality Condition for Stochastic Models with CRRA Utility," Discussion Paper Series 137, Research Institute for Economics & Business Administration, Kobe University.
    14. Luigi Montrucchio, 2004. "Cass transversality condition and sequential asset bubbles," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(3), pages 645-663, October.
    15. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    16. Werner, Jan, 2014. "Rational asset pricing bubbles and debt constraints," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 145-152.
    17. Takashi Kamihigashi, 1998. "Uniqueness of asset prices in an exchange economy with unbounded utility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(1), pages 103-122.
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