On the interplay between speculative bubbles and productive investment

Xavier Raurich and Thomas Seegmuller

No 2016/352, UB School of Economics Working Papers from University of Barcelona School of Economics

Abstract: The aim of this paper is to study the interplay between long term productive investments and more short term and liquid speculative ones. A three-period lived overlapping generations model allows us to make this distinction. Agents have two investment decisions. When young, they can invest in productive capital that provides a return during the following two periods. When young or in the middle age, they can also invest in a bubble. Assuming, in accordance with the empirical evidence, that the bubbleless economy is dynamically efficient, the existence of a stationary bubble raises productive investment and production. Indeed, young agents sell short the bubble to increase productive investments, whereas traders at middle age transfer wealth to the old age. We outline that a technological change inducing either a larger return of capital in the short term or a similar increase in the return of capital in both periods raises productive capital, production and the bubble size. This framework also allows us to discuss several economic applications: the effects of both regulation on limited borrowing and fiscal policy on the occurrence of bubbles, the introduction of a probability of market crash and the effect of bubbles on income inequality.

Keywords: Bubble; Efficiency; Vintage capital; Short sellers; Overlapping generations. (search for similar items in EconPapers)
JEL-codes: E22 E44 G12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
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Related works:
Journal Article: On the interplay between speculative bubbles and productive investment (2019)
Working Paper: On the interplay between speculative bubbles and productive investment (2019)
Working Paper: On the Interplay Between Speculative Bubbles and Productive Investment (2015)
Working Paper: On the Interplay Between Speculative Bubbles and Productive Investment (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ewp:wpaper:352web

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