The Spirit of Capitalism, Stock Market Bubbles, and Output Fluctuations

Takashi Kamihigashi

No 205, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This paper presents a representative agent model in which stock market bubbles cause output fluctuations. Assuming that utility depends directly on wealth, we show that stock market bubbles arise if the marginal utility of wealth does not decline to zero as wealth goes to infinity. Bubbles may affect output positively or negative depending on whether the production function exhibits increasing or decreasing returns to scale. In sunspot equilibria, the bursting of a bubble is followed by a sharp decline in output one period later. Various numerical examples are given to illustrate the behavior of stochastic bubbles and the relationship between bubbles and output.

Keywords: Spirit of capitalism; Stock market bubbles; Output fluctuations; Wealth in utility; Sunspot equilibria (search for similar items in EconPapers)
JEL-codes: E20 E32 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2007-07, Revised 2007-10
New Economics Papers: this item is included in nep-bec, nep-dge, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/dp205.pdf Revised version, 2007 (application/pdf)

Related works:
Journal Article: The spirit of capitalism, stock market bubbles and output fluctuations (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:kob:dpaper:205

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