Rational Bubble on Interest-Bearing Assets

Hajime Tomura

No 45, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: This paper compares fiat money and a Lucas' tree in an overlap- ping generations model. A Lucas' tree with a positive dividend has a unique competitive equilibrium price. Moreover, the price converges to the monetary equilibrium value of fiat money as the dividend goes to zero in the limit. Thus, the value of liquidity represented by a ra- tional bubble is part of the fundamental price of a standard interest- bearing asset. A Lucas' tree has multiple equilibrium prices if the dividend vanishes permanently with some probability. This case may be applicable to public debt, but not to stock or urban real estate.

Pages: 14 pages
Date: 2015-01
New Economics Papers: this item is included in nep-dge and nep-mon
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