Tracing the History of Asset Price Bubble Theory

The literature on rational asset price bubbles has grown substantially, yet its internal logic is difficult to trace without reading across a large and technically demanding body of work. This paper provides a guide to the literature on rational asset price bubble theory, tracing its evolution from early overlapping generations models to environments with financial frictions, infinitely lived agents, and dividend-paying assets. Two mechanisms consistently sustain rational bubbles across these frameworks. The first is resale: investors buy above fundamental value, expecting to sell to subsequent buyers. The second is savings pressure that pushes the bubbleless equilibrium interest rate below the economy’s growth rate. Despite substantial theoretical progress, a gap remains between theoretical insights and the frameworks policymakers need.