A Double Counting Problem in the Theory of Rational Bubbles

Hajime Tomura

No 66, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: In a standard overlapping generations model, the unique equilibrium price of a Lucas' tree can be decomposed into the present discounted value of dividends and the stationary monetary equilibrium price of fiat money, the latter of which is a rational bubble. Thus, the standard interpretation of a rational bubble as the speculative component in an asset price double-counts the value of pure liquidity that is already part of the fundamental price of an interest-bearing asset.

Keywords: rational bubbles; liquidity. (search for similar items in EconPapers)
JEL-codes: E3 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2016-05
New Economics Papers: this item is included in nep-dge, nep-hpe, nep-mac and nep-mon
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