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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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File URL: ftp://mse.univ-paris1.fr/pub/mse/CES2014/14043.pdf
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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. Becker, Robert A. & Mitra, Tapan, 2012. "Efficient Ramsey Equilibria," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S1), pages 18-32, April.
  2. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
  3. Ventura, Jaume, 2002. "Bubbles and Capital Flows," CEPR Discussion Papers 3657, C.E.P.R. Discussion Papers.
  4. Robert Becker & Stefano Bosi & Cuong Le Van & Thomas Seegmuller, 2014. "On existence and bubbles of Ramsey equilibrium with borrowing constraints," Documents de travail du Centre d'Economie de la Sorbonne 14040, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  5. 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.
  6. Narayana R. Kocherlakota, 2006. "Injecting Rational Bubbles," Levine's Bibliography 122247000000000905, UCLA Department of Economics.
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  10. Aloisio Araujo & Mário R. Pascoa & Juan Pablo Torres-Martínez, 2010. "Long-lived collateralized assets and bubbles," Working Papers wp314, University of Chile, Department of Economics.
  11. 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.
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  13. Julio Davila & Jay H. Hong & Per Krusell & Jose-Victor Rios-Rull, 2005. "Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks," PIER Working Paper Archive 05-023, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  14. Mitra, Tapan & Ray, Debraj, 2009. "On the Phelps-Koopmans Theorem," Working Papers 09-04, Cornell University, Center for Analytic Economics.
  15. Markus K. Brunnermeier & Martin Oehmke, 2012. "Bubbles, Financial Crises, and Systemic Risk," NBER Working Papers 18398, National Bureau of Economic Research, Inc.
  16. Emmanuel Farhi & Jean Tirole, 2011. "Bubbly Liquidity," NBER Working Papers 16750, National Bureau of Economic Research, Inc.
  17. Werner, Jan, 2014. "Rational asset pricing bubbles and debt constraints," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 145-152.
  18. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  19. Ventura, Jaume, 2012. "Bubbles and capital flows," Journal of Economic Theory, Elsevier, vol. 147(2), pages 738-758.
  20. Takashi Kamihigashi, 2002. "A simple proof of the necessity of the transversality condition," Economic Theory, Springer, vol. 20(2), pages 427-433.
  21. Kevin X.D. Huang & Jan Werner, 2000. "Asset price bubbles in Arrow-Debreu and sequential equilibrium," Economic Theory, Springer, vol. 15(2), pages 253-278.
  22. Antonio Doblas‐Madrid, 2012. "A Robust Model of Bubbles With Multidimensional Uncertainty," Econometrica, Econometric Society, vol. 80(5), pages 1845-1893, 09.
  23. Cass, D & Yaari, M E, 1971. "Present Values Playing the Role of Efficiency Prices in the One-Good Growth Model," Review of Economic Studies, Wiley Blackwell, vol. 38(115), pages 331-39, July.
  24. 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.
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