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Rational Bubble on Interest-Bearing Assets

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  • Hajime Tomura

    (Graduate School of Economics, University of Tokyo)

Abstract

This paper compares fiat money and a Lucas' tree in an overlap- ping generations model. A Lucas' tree with a positive dividend has a unique competitive equilibrium price. Moreover, the price converges to the monetary equilibrium value of fiat money as the dividend goes to zero in the limit. Thus, the value of liquidity represented by a ra- tional bubble is part of the fundamental price of a standard interest- bearing asset. A Lucas' tree has multiple equilibrium prices if the dividend vanishes permanently with some probability. This case may be applicable to public debt, but not to stock or urban real estate.

Suggested Citation

  • Hajime Tomura, 2015. "Rational Bubble on Interest-Bearing Assets," UTokyo Price Project Working Paper Series 045, University of Tokyo, Graduate School of Economics.
    • Handle: RePEc:upd:utppwp:045
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    References listed on IDEAS

    as
    1. Kocherlakota, Narayana, 2008. "Injecting rational bubbles," Journal of Economic Theory, Elsevier, vol. 142(1), pages 218-232, September.
    2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467-467.
    3. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
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