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

Robert Kollmann ()

No 2020-02, Working Papers ECARES from ULB -- Universite Libre de Bruxelles

Abstract: This paper studies rational bubbles in non-linear dynamic general equilibrium models of the macroeconomy. The term ‘Rational bubble’ refers to multiple equilibria due to the absence of a transversality condition (TVC) for capital. The lack of TVC can be due to an OLG population structure. If a TVC is imposed, the macro models considered here have a unique solution. 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 bounded. Bounded rational bubbles provide a novel perspective on the drivers and mechanisms of business cycles. I construct bubbles (in non-linear models) that feature recurrent boom-bust cycles characterized by persistent investment and output expansions which are followed by abrupt contractions in real activity. 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. Global bubbles may, thus, help to explain the synchronization of international business cycles.

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)
Pages: 58 p.
Date: 2020-01
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published by:

Downloads: (external link)
https://dipot.ulb.ac.be/dspace/bitstream/2013/3015 ... OLLMANN-rational.pdf Œuvre complète ou partie de l'œuvre (application/pdf)

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)
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:eca:wpaper:2013/301557

Ordering information: This working paper can be ordered from
http://hdl.handle.ne ... lb.ac.be:2013/301557

Access Statistics for this paper

More papers in Working Papers ECARES from ULB -- Universite Libre de Bruxelles Contact information at EDIRC.
Bibliographic data for series maintained by Benoit Pauwels ().