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Capital price bubbles and dynamic inefficiency

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Abstract

We demonstrate that the price of physical capital in standard neoclassical one-sector growth models can exceed its fundamental value, that is, a capital price bubble can exist. It is furthermore shown that the existence of a capital price bubble is in general unrelated to the dynamic inefficiency of equilibrium. We illustrate these results in the contexts of the Ramsey-Cass-Koopmans model with finitely many infinitely-lived dynasties of households, the Blanchard-Yaari model with infinitely many overlapping generations of finitely-lived households, and the Solow-Swan model without microfoundation. Our findings are in contrast to those derived by Tirole [17] and they are complementary to those from Kocherlakota [8] and Tirole [18].

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  • Gerhard Sorger, 2018. "Capital price bubbles and dynamic inefficiency," Vienna Economics Papers vie1802, University of Vienna, Department of Economics.
    • Handle: RePEc:vie:viennp:vie1802
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    References listed on IDEAS

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    1. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
    2. Sasaki, Hiroaki & Hoshida, Keisuke, 2017. "The Effects Of Negative Population Growth: An Analysis Using A Semiendogenous R&D Growth Model," Macroeconomic Dynamics, Cambridge University Press, vol. 21(7), pages 1545-1560, October.
    3. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    4. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
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    More about this item

    JEL classification:

    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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