To Bubble or Not to Bubble: Asset Price Dynamics and Optimality in OLG Economies

Ngoc Sang Pham, Cuong Le Van and Stefano Bosi

MPRA Paper from University Library of Munich, Germany

Abstract: We study an overlapping generations (OLG) exchange economy with an asset that yields dividends. First, we derive general conditions, based on exogenous parameters, that give rise to three distinct scenarios: (1) only bubbleless equilibria exist, (2) a bubbleless equilibrium coexists with a continuum of bubbly equilibria, and (3) all equilibria are bubbly. Under stationary endowments and standard assumptions, we provide a complete characterization of the equilibrium set and the associated asset price dynamics. In this setting, a bubbly equilibrium exists if and only if the interest rate in the economy without the asset is strictly lower than the population growth rate and the sum of per capita dividends is finite. Second, we establish necessary and sufficient conditions for Pareto optimality. Finally, we investigate the relationship between asset price behaviors and the optimality of equilibria.

Keywords: exchange economy; overlapping generations; asset price bubble; fundamental value; low interest rate; Pareto optimal (search for similar items in EconPapers)
JEL-codes: C6 D5 D61 E4 G12 (search for similar items in EconPapers)
Date: 2025-08-04
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-gro
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