Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies

Robert Kollmann ()

No 14367, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies rational bubbles in non-linear dynamic general equilibrium models of the macroeconomy. The term ‘rational bubbles’ refers to multiple equilibria arising from the absence of a transversality condition (TVC) for capital. The lack of TVC can be due to an overlapping generations structure. Rational bubbles reflect self-fulfilling fluctuations in agents’ expectations about future investment. In contrast to explosive rational bubbles in linearized models (Blanchard (1979)), the rational bubbles in non-linear models here are stable and bounded. Bounded bubbles can generate persistent fluctuations of real activity, and capture key business cycle stylized facts. Both closed and open economies are analyzed. In a non-linear two-country model with integrated financial markets, bubbles must be perfectly correlated across countries.

Keywords: Rational bubbles; Boom-bust cycles; Business cycles in closed and open economies; Non-linear dsge models; Long-plosser model; Dellas model (search for similar items in EconPapers)
JEL-codes: C6 E1 E3 F3 F4 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-dge, nep-mac, nep-opm and nep-ore
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Related works:
Working Paper: Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies (2020)
Working Paper: Rational bubbles in non-linear business cycle models: Closed and open economies (2020)
Working Paper: Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies (2020)
Working Paper: Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies (2020)
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