EconPapers    
Economics at your fingertips  
 

Are speculative bubbles welfare improving? A note on Wang and Wen (2012)

Jürg Fausch and Markus Sigonius

Economics Letters, 2020, vol. 190, issue C

Abstract: Wang and Wen (2012) show in a DSGE model that the existence of speculative bubbles are welfare improving. In their steady state analysis of the benchmark model the authors claim the existence of a unique steady state in the bubble equilibrium with a higher capital stock and hence higher output compared to the fundamental equilibrium. This is due to higher investment efficiency because firms can use bubble assets as a store of value when they are hit by an adverse investment shock. In this note we demonstrate that this claim is at odds with our finding of the existence of an additional, less favorable, steady state in the bubble equilibrium. In the new steady state, allocations are very similar to the steady state without bubbles, which implies a deterioration of investment efficiency, if the economy is in the new, less favorable bubble steady state.

Keywords: Asset pricing; Boom-bust cycle; Financial crisis; Speculative bubble; Sunspot (search for similar items in EconPapers)
JEL-codes: E13 E23 E32 E44 G01 G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176520300756
Full text for ScienceDirect subscribers only

Related works:
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:eee:ecolet:v:190:y:2020:i:c:s0165176520300756

DOI: 10.1016/j.econlet.2020.109076

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().

 
Page updated 2021-06-30
Handle: RePEc:eee:ecolet:v:190:y:2020:i:c:s0165176520300756