Capital price bubbles and dynamic inefficiency

Gerhard Sorger

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: We demonstrate that the price of physical capital in standard neoclassical one-sector growth models can exceed its fundamental value, that is, a capital price bubble can exist. It is furthermore shown that the existence of a capital price bubble is in general unrelated to the dynamic inefficiency of equilibrium. We illustrate these results in the contexts of the Ramsey-Cass-Koopmans model with finitely many infinitely-lived dynasties of households, the Blanchard-Yaari model with infinitely many overlapping generations of finitely-lived households, and the Solow-Swan model without microfoundation. Our findings are in contrast to those derived by Tirole [17] and they are complementary to those from Kocherlakota [8] and Tirole [18].

JEL-codes: G10 O41 (search for similar items in EconPapers)
Date: 2018-02
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