On rational exuberance
In his seminal contribution, Tirole (1985) shows that an overlapping generations economy may monotonically converges to a steady state with a positive rational bubble, characterized by the dynamically efficient golden rule. The issue we address is whether this monotonic convergence to an efficient long-run equilibrium may fail, while the economy experiences persistent endogenous fluctuations around the golden rule. Our explanation leads on the features of the credit market. We consider a simple overlapping generations model with three assets : money, capital and a pure bubble (bonds). Collateral matters because increasing his portfolio in capital and bubble, the household reduces the share of his consumption paid by cash. From a positive point of view, we show that the bubbly steady state can be locally indeterminate under arbitrarily small credit market imperfections and, thereby, persistent expectation-driven fluctuations of equilibria with (rational) bubbles can arise. From a normative point of view, monetary policies that are not too expansive, are recommended in order to rule out the occurence of sunspot fluctuations and enhance the welfare evaluated at the steady state
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- Philippe Michel & Bertrand Wigniolle, 2005.
"Cash-in-advance constraints, bubbles and monetary policy,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
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2343, National Bureau of Economic Research, Inc.
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97-28, Centre de Recherche en Economie et Statistique.
- Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May.
- GRANDMONT, Jean-Michel & PINTUS, Patrick & de VILDER, Robin, 1997. "Capital-labor substitution and competitive nonlinear endogenous business cycles," CORE Discussion Papers 1997087, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-1181, September.
- Michel, Philippe & Wigniolle, Bertrand, 2003. "Temporary bubbles," Journal of Economic Theory, Elsevier, vol. 112(1), pages 173-183, September.
- Bosi, Stefano & Magris, Francesco, 2003. "Indeterminacy and endogenous fluctuations with arbitrarily small liquidity constraint," Research in Economics, Elsevier, vol. 57(1), pages 39-51, March.
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