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Intertemporal equilibrium with production: bubbles and efficiency

We consider a general equilibrium model with heterogeneous agents, borrowing constraints, and exogenous labor supply. First, the existence of intertemporal equilibrium is proved even if the aggregate capitals are not uniformly bounded above and the production functions are not time invariant. Second, (i) we call by physical capital bubble a situation in which the fundamental value of physical capital is lower than its price, (ii) we say that the interest rates are low if the sum of interest rates is finite. We show that physical capital bubble is equivalent to a situation with low interest rates. Last, we prove that with linear technologies, every intertemporal equilibrium is efficient. Moreover, there is a room for both efficiency and bubble.

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Paper provided by Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne in its series Documents de travail du Centre d'Economie de la Sorbonne with number 14043.

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Length: 16 pages
Date of creation: May 2014
Date of revision:
Handle: RePEc:mse:cesdoc:14043
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  1. Kocherlakota, N.R., 1990. "Bubbles and Constraints on Debt Accumulation," Working Papers 90-29, University of Iowa, Department of Economics.
  2. DAVILA, Julio & HONG, Jay H. & KRUSELL, Per & RIOS-RULL, José-Victor, . "Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks," CORE Discussion Papers RP 2463, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Jaume Ventura, 2004. "Bubbles and capital flows," 2004 Meeting Papers 102, Society for Economic Dynamics.
  4. Araujo, Aloisio & Páscoa, Mário R. & Torres-Martínez, Juan Pablo, 2011. "Long-lived collateralized assets and bubbles," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 260-271.
  5. Becker, Robert A. & Mitra, Tapan, 2012. "Efficient Ramsey Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S1), pages 18-32, April.
  6. Jaume Ventura & Alberto Martín, 2003. "Economic Growth with Bubbles," Working Papers 204, Barcelona Graduate School of Economics.
  7. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  8. Robert Becker & Stefano Bosi & Cuong Le Van & Thomas Seegmuller, 2014. "On existence and bubbles of Ramsey equilibrium with borrowing constraints," Working Papers 2014-105, Department of Research, Ipag Business School.
  9. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, Elsevier.
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  11. 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.
  12. Werner, Jan, 2014. "Rational asset pricing bubbles and debt constraints," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 145-152.
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  14. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  15. Farhi, Emmanuel & Tirole, Jean, 2009. "Bubbly Liquidity," IDEI Working Papers 577, Institut d'Économie Industrielle (IDEI), Toulouse, revised Feb 2011.
  16. Gaetano Bloise & Pietro Reichlin, 2008. "Asset prices, debt constraints and inefficiency," Departmental Working Papers of Economics - University 'Roma Tre' 0089, Department of Economics - University Roma Tre.
  17. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  18. Takashi Kamihigashi, 2002. "A simple proof of the necessity of the transversality condition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(2), pages 427-433.
  19. Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
  20. Mitra, Tapan & Ray, Debraj, 2012. "On the Phelps–Koopmans theorem," Journal of Economic Theory, Elsevier, vol. 147(2), pages 833-849.
  21. Antonio Doblas‐Madrid, 2012. "A Robust Model of Bubbles With Multidimensional Uncertainty," Econometrica, Econometric Society, vol. 80(5), pages 1845-1893, 09.
  22. D. Cass & M. E. Yaari, 1971. "Present Values Playing the Role of Efficiency Prices in the One-Good Growth Model," Review of Economic Studies, Oxford University Press, vol. 38(3), pages 331-339.
  23. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
  24. Narayana R. Kocherlakota, 2006. "Injecting Rational Bubbles," Levine's Bibliography 122247000000000905, UCLA Department of Economics.
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