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Rational bubbles and the spirit of capitalism

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  • Zhou, Ge

Abstract

This paper explores the existence of rational bubbles in the pricing of an asset that pays no dividend. I find that when "the spirit of capitalism" is introduced into a growth model, rational bubbles do exist provided that the marginal benefit from holding wealth is nontrivial relative to the marginal utility of consumption as time goes to infinity. I use phase diagrams to discuss the property of the bubbly equilibrium and I use two examples to describe the bubbly equilibrium trajectory explicitly and more intuitively. Moreover, I show that a stochastic bubble, which bursts with an exogenous probability, could exist. This could provide a simple theoretical foundation to explore economic implications of the collapse of bubbles.

Suggested Citation

  • Zhou, Ge, 2011. "Rational bubbles and the spirit of capitalism," MPRA Paper 33988, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:33988
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    File URL: https://mpra.ub.uni-muenchen.de/44719/8/MPRA_paper_44719.pdf
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    References listed on IDEAS

    as
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    5. Kocherlakota, Narayana R., 1992. "Bubbles and constraints on debt accumulation," Journal of Economic Theory, Elsevier, vol. 57(1), pages 245-256.
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    Cited by:

    1. Zhou, Ge, 2012. "Rational equity bubbles," MPRA Paper 39398, University Library of Munich, Germany.

    More about this item

    Keywords

    bubbles; the spirit of capitalism; growth;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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