Bubble Necessity Theorem

Tomohiro Hirano and Alexis Akira Toda

Papers from arXiv.org

Abstract: Asset price bubbles are situations where asset prices exceed the fundamental values defined by the present value of dividends. This paper presents a conceptually new perspective: the necessity of bubbles. We establish the Bubble Necessity Theorem in a plausible general class of economic models: with faster long-run economic growth ($G$) than dividend growth ($G_d$) and counterfactual long-run autarky interest rate ($R$) below dividend growth, all equilibria are bubbly with non-negligible bubble sizes relative to the economy. This bubble necessity condition naturally arises in economies with sufficiently strong savings motives and multiple factors or sectors with uneven productivity growth.

Date: 2023-05, Revised 2024-04
New Economics Papers: this item is included in nep-fdg and nep-gro
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Related works:
Journal Article: Bubble Necessity Theorem (2025)
Working Paper: Bubble Necessity Theorem (2024)
Working Paper: Bubble Necessity Theorem (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2305.08268

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