Bubbles and Constraints on Debt Accumulation
It is commonly thought (Tirole, Econometrica50 (1982), 1163–1182) that bubbles cannot occur in deterministic sequential market economies with a finite number of infinitely lived agents. This paper shows that the constraint on debt accumulation which make possible the existence of equilibrium can cause bubbles. If agents face a wealth constraint, bubbles can exist if and only if the assest is in zero net supply. If agents face exogenous short sales constraints, bubbles can exists if and only if some agent's endowment grows at a rate larger than the rate of return and the short sales constraint binds that agent infinitely often.
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|Date of creation:||1990|
|Date of revision:|
|Contact details of provider:|| Postal: University of Iowa, Department of Economics, Henry B. Tippie College of Business, Iowa City, Iowa 52242|
Phone: (319) 335-0829
Fax: (319) 335-1956
Web page: http://tippie.uiowa.edu/economics/
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