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ESBies: safety in the tranches

Markus Brunnermeier (), Sam Langfield (), Marco Pagano (), Ricardo Reis, Stijn Van Nieuwerburgh and Dimitri Vayanos

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: It is well known that rational bubbles can be sustained in balanced growth path of a deterministic economy when the return to capital r is equal to the growth rate g. When there is a lack of stores of value, bubbles can implement an e¢ cient allocation. This paper considers a world where r áuctuates over time due to shocks to the marginal productivity of capital. Then, bubbles further e¢ ciency, though they cannot implement Örst best. While bubbles can only be sustained when r = g in a deterministic economy, r > g "on average" in a stochastic economy. Fiscal policy improves welfare by adding an extra asset. Where only the elderly contribute to shifting resources between investment and consumption in a bubbly economy, Öscal policy allows part of that burden to be shifted to the young. Contrary to common wisdom, trade in bubbly assets implements intergenerational transfers, while Öscal policy implements intragenerational transfers. Hence, while bubbles and Öscal policy are perfect substitutes in the deterministic economy, Öscal policy dominates bubbles in a stochastic economy. For plausible parameter values, a higher degree of dynamic ine¢ ciency should lead to a higher sovereign debt.

JEL-codes: J1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2016-09-12
References: View references in EconPapers View complete reference list from CitEc
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http://eprints.lse.ac.uk/86221/ Open access version. (application/pdf)

Related works:
Journal Article: ESBies: safety in the tranches (2017) Downloads
Working Paper: ESBies: safety in the tranches (2017) Downloads
Working Paper: ESBies: Safety in the tranches (2016) Downloads
Working Paper: ESBies: Safety in the Tranches (2016) Downloads
Working Paper: ESBies - Safety in the tranches (2016) Downloads
Working Paper: ESBies: Safety in the Tranches (2016) Downloads
Working Paper: ESBies: Safety in the tranches (2016) Downloads
Working Paper: ESBies: Safety in the tranches (2016) Downloads
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