Boom and Bust Cycle of the Stock Market, and Economic Growth in a Vintage Capital Model

Takeshi Kobayashi and Masaya Sakuragawa

International Journal of Economic Theory, 2008, vol. 4, issue 3, 411-432

Abstract: We construct a growth model of overlapping generations with vintage capital. There exists an equilibrium that converges to the balanced growth path through endogenous fluctuations of investment, consumption, and output in terms of the growth rate. When the technological change arrives and a rise in productivity is embodied only in newly invested capital, the economy converges to a new balanced growth path with a higher growth rate of output, but when we interpret the price of existing old capital as the stock market capitalization, the rise in productivity is accompanied by an initial decline in the stock market. Oscillatory equilibria are supported as perfect‐foresight equilibria in the present framework with finitely lived agents and capital. Any oscillatory equilibrium is associated with the regime switch from an economy with both young and old capital in use into one with only old capital in use.

Date: 2008
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https://doi.org/10.1111/j.1742-7363.2008.00086.x

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