Bubbles in Stochastic Economies: Can They Cure Overaccumulation of Capital?

Mathias Binswanger

Journal of Economics, 2005, vol. 84, issue 2, 179-202

Abstract: It is well known that bubbles possess the potential to increase economic welfare due to a reduction of capital accumulation in deterministic overlapping generations economies that are in a dynamically inefficient state. However, actual economies are stochastic, where the concept of dynamic efficiency has turned out to be a complex issue. This paper contributes in two ways. First, the model presented in this paper establishes that dynamic inefficiency is not a necessary condition for deterministic bubbles in a stochastic economy. Second, a simulation shows that although bubbles are unable to persist in the stochastic steady state, they can still cure overaccumulation of capital for a time long enough to cover agents’ relevant time horizon. Copyright Springer-Verlag Wien 2005

Keywords: bubbles; dynamic efficiency; capital overaccumulation; stochastic OLG model; D61; E44 (search for similar items in EconPapers)
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:kap:jeczfn:v:84:y:2005:i:2:p:179-202

DOI: 10.1007/s00712-004-0102-x

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