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

Robert Kollmann ()

MPRA Paper from University Library of Munich, Germany

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: E1; E3; F3; F4; C6 (search for similar items in EconPapers)
JEL-codes: C6 E1 E3 F3 F4 (search for similar items in EconPapers)
Date: 2020-01-29
New Economics Papers: this item is included in nep-dge, nep-mac, nep-opm and nep-ore
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https://mpra.ub.uni-muenchen.de/98412/1/MPRA_paper_98412.pdf original version (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)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:98412

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