On rational exuberance

Stefano Bosi () and Thomas Seegmuller
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Stefano Bosi: EQUIPPE - Université de Lille 1 et EPEE - Université d'Evry

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: In his seminal contribution, Tirole (1985) shows that an overlapping generations economy may monotonically converges to a steady state with a positive rational bubble, characterized by the dynamically efficient golden rule. The issue we address is whether this monotonic convergence to an efficient long-run equilibrium may fail, while the economy experiences persistent endogenous fluctuations around the golden rule. Our explanation leads on the features of the credit market. We consider a simple overlapping generations model with three assets: money, capital and a pure bubble (bonds). Collateral matters because increasing his portfolio in capital and bubble, the household reduces the share of his consumption paid by cash. From a positive point of view, we show that the bubbly steady state can be locally indeterminate under arbitrarily small credit market imperfections and, thereby, persistent expectation-driven fluctuations of equilibria with (rational) bubbles can arise. From a normative point of view, monetary policies that are not too expansive, are recommended in order to rule out the occurence of sunspot fluctuations and enhance the welfare evaluated at the steady state

Keywords: Bubbles; collaterals; indeterminacy; cash-in-advance constraint; overlapping generations (search for similar items in EconPapers)
JEL-codes: D91 E32 E50 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2009-01
New Economics Papers: this item is included in nep-dge and nep-hpe
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Citations: View citations in EconPapers (2)

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ftp://mse.univ-paris1.fr/pub/mse/CES2009/09004.pdf (application/pdf)

Related works:
Journal Article: On rational exuberance (2010)
Working Paper: On Rational Exuberance (2009)
Working Paper: On Rational Exuberance (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:09004

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