Deflationary Bubbles

Willem Hendrik Buiter and Anne Sibert ()

No 5637, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In an attempt to clean up an unruly literature, we specify the necessary and sufficient conditions for household optimality in a model where money is the only financial asset and provide the relevant proofs. We use our results to analyse when deflationary bubbles can and cannot exist. Our findings are in contrast to the results in several prominent contributions to the literature. We argue for particular specifications of the no-Ponzi-game restrictions on the household's and government's intertemporal budget constraints in a model with money and bonds. Using the restriction on the household we derive the necessary and sufficient conditions for household optimality. The resulting equilibrium terminal conditions are then used to demonstrate that the existence of bonds does not affect when deflationary bubbles can and cannot occur. This result differs from that in other recent works.

Keywords: deflationary bubbles; transversatility conditions (search for similar items in EconPapers)
JEL-codes: D91 E31 E40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-mac and nep-mon
Date: 2006-04
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Related works:
Working Paper: Deflationary Bubbles (2004)
Working Paper: Deflationary Bubbles (2004)
Working Paper: Deflationary Bubbles (2004)
Journal Article: DEFLATIONARY BUBBLES (2007)
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