Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies

Robert Kollmann ()

No 378, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: This paper studies rational bubbles in non-linear dynamic general equilibrium models of the macroeconomy. The term ‘rational bubble’ refers to multiple equilibria due to the absence of a transversality condition (TVC) for capital. The lack of TVC can be due to an OLG population structure. If a TVC is imposed, the macro models considered here have a unique solution. Bubbles reflect self-fulfilling fluctuations in agents’ expectations about future investment. In contrast to explosive rational bubbles in linearized models (Blanchard (1979)), the rational bubbles in non-linear models here are bounded. Bounded rational bubbles provide a novel perspective on the drivers and mechanisms of business cycles. I construct bubbles (in non-linear models) that feature recurrent boom-bust cycles characterized by persistent investment and output expansions which are followed by abrupt contractions in real activity. Both closed and open economies are analyzed. In a non-linear two-country model with integrated financial markets, bubbles must be perfectly correlated across countries. Global bubbles may, thus, help to explain the synchronization of international business cycles.

Keywords: rational bubbles; boom-bust cycles; business cycles in closed and open economies; non-linear DSGE models; Long-Plosser model; Dellas model (search for similar items in EconPapers)
JEL-codes: C6 E1 E3 F3 F4 (search for similar items in EconPapers)
Pages: 59
Date: 2020-02-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.dallasfed.org/~/media/documents/institute/wpapers/2020/0378.pdf (application/pdf)

Related works:
Working Paper: Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies (2020)
Working Paper: Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies (2020)
Working Paper: Rational bubbles in non-linear business cycle models: Closed and open economies (2020)
Working Paper: Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:87485

DOI: 10.24149/gwp378

Access Statistics for this paper

More papers in Globalization Institute Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().