Real indeterminacy and dynamics of asset price bubbles in general equilibrium

Le Van, Cuong and Pham, Ngoc-Sang and Bosi, Stefano (2019): Real indeterminacy and dynamics of asset price bubbles in general equilibrium.

Abstract

We show that both real indeterminacy and asset price bubble may appear in an infinite-horizon exchange economy with infinitely lived agents and an imperfect financial market. We clarify how the asset structure and heterogeneity (in terms of preferences and endowments) affect the existence and the dynamics of asset price bubbles as well as the equilibrium indeterminacy. Moreover, this paper bridges the literature on bubbles in models with infinitely lived agents and that in overlapping generations models (Tirole, 1985).

• Item Type: MPRA Paper
• Language: English
• Keywords: asset price bubble, real indeterminacy, borrowing constraint, intertemporal equilibrium, infinite horizon
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium; D - Microeconomics > D9 - Intertemporal Choice; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

References

Araujo, A., Novinski, R., Pascoa, M.R., 2011. General equilibrium, wariness and efficient bubbles. Journal of Economic Theory 46, p. 785-811.

Araujo, A., Pascoa, M.R., Torres-Martinez, J.P., 2011. Long-lived collateralized assets and bubbles. Journal of Mathematical Economics 47, 260-271.

Alvarez, F., Jermann, U.J., 2000. Efficiency, equilibrium, and asset pricing with risk of default. Econometric 68(4), p. 775-797.

Becker, R., Bosi, S., Le Van, C., Seegmuller, T., 2015. On existence and bubbles of Ramsey equilibrium with borrowing constraints. Economic Theory 58, 329-353.

Benhabib, J., Farmer R.E.A., 1999. Indeterminacy and sunspots in macroeconomics. In: Taylor, J.B., Woodford, M., (Eds.) Handbook of Macroeconomics, vol. 1, issue: part A, p. 387-448, Elsevier Science BV.

Barbie, M., Hillebrand, M., 2018. Bubbly Markov equilibria, Economic Theory, vol. 66, p. 627-679.

Bewley T., 1980. The optimal quantity of money. In: Kareken, J.H., Wallace, N., (Eds.) Models of Monetary Economics, Federal Reserve Bank of Minneapolis, p. 169-210.

Bloise G, Citanna A., 2019. Asset shortages, liquidity and speculative bubbles, Journal of Economic Theory, vol. 183, p. 952-990.

Bosi, S., Ha-Huy, T., Le Van, C., Pham, C.T., Pham, N.-S., 2018a. Financial bubbles and capital accumulation in altruistic economies, Journal of Mathematical Economics, vol. 75, p. 125-139.

Bosi, S., Le Van, C., Pham, N.-S., 2017a. Asset bubbles and efficiency in a generalized two-sector model, Mathematical Social Sciences, vol. 88, p. 37-48.

Bosi, S., Le Van, C., Pham, N.-S., 2017b. Intertemporal equilibrium with heterogeneous agents, endogenous dividends and collateral constraints, CES working paper series, No. 2015.67R.

Bosi, S., Le Van, C., Pham, N.-S., 2018b. Intertemporal equilibrium with heterogeneous agents, endogenous dividends and collateral constraints, Journal of Mathematical Economics, vol. 76, p. 1-20.

Bosi, S., Le Van, C., Pham, N.-S., 2019. Real indeterminacy and dynamics of asset price bubbles in general equilibrium, MPRA Paper, No. MPRA paper 96834.

Brunnermeier, M.K., Oehmke, M., 2012. Bubbles, financial crises, and systemic risk. Handbook of the Economics of Finance, vol. 2. Doblas-Madrid A., 2012. A robust model of bubbles with multidimensional uncertainty, Econometrica 80, p. 1845-1893.

Farhi, E., Tirole, J., 2012. Bubbly liquidity. Review of Economic Studies 79, p. 678-706.

Farmer R.E.A., 2019. The Indeterminacy Agenda in Macroeconomics, NBER Working Paper, No. 25879.

Gali, J., 2014. Monetary Policy and Rational Asset Price Bubbles. American Economic Review 104, p. 721{752.

Gali, J., 2018. Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations. Economics Working Papers 1561, Department of Economics and Business, Universitat Pompeu Fabra.

Huang, K. X. D., Werner, J., 2000. Asset price bubbles in Arrow-Debreu and sequential equilibrium. Economic Theory 15, p. 253-278.

Hirano, T., Yanagawa, N., 2017. Asset Bubbles, Endogenous Growth, and Financial Frictions. The Review of Economic Studies, vol. 84, p. 406-443.

Kamihigashi, T., 2002. A simple proof of the necessity of the transversality condition. Economic Theory 20, 427-433.

Kehoe, T.J., Levine, D.K., 1985. Comparative statics and perfect foresight in infinite horizon economies. Econometrica 53, No. 2, p. 433-453.

Kehoe, T.J., Levine, D.K., Romer, P.M., 1990. Determinacy of equilibria in dynamic models with finitely many consumers. Journal of Economic Theory 50, p. 1-21.

Kiyotaki, N., Moore, J., 1997. Credit cycles. Journal of Political Economy, 105(2), p. 211- 248.

Kocherlakota, N. R., 1992. Bubbles and constraints on debt accumulation. Journal of Economic Theory 57, p. 245 - 256.

Kocherlakota, N. R., 2008. Injecting rational bubbles. Journal of Economic Theory 142, p. 218 - 232.

Le Van, C., Pham, N.-S., 2016. Intertemporal equilibrium with financial asset and physical capital. Economic Theory 62, p. 155-199.

Levine, D. K., Zame, W. R., 1996. Debt constraints and equilibrium in infinite horizon economies with incomplete markets. Journal of Mathematical Economics 26, p. 103-131.

Ljungqvist, L., Sargent, T. J. 2012. Recursive Macroeconomic Theory, third edition, The MIT Press.

Lucas, R. E., 1978. Asset prices in an exchange economy. Econometrica 46, p. 1429-1445.

Magill, M., Quinzii, M., 1994. Infinite Horizon Incomplete Markets. Econometrica 62, p. 853-880.

Magill, M., Quinzii, M., 1996. Incomplete markets over an infinite horizon: Long-lived securities and speculative bubbles. Journal of Mathematical Economics 26, p. 133-170.

Martin, A., Ventura, J., 2012. Economic growth with bubbles. American Economic Review 102, p. 3033 - 3058.

Martin, A., Ventura, J., 2018. The Macroeconomics of Rational Bubbles: A User’s Guide. Annual Review of Economics, 10(1), 505{539. https://doi.org/10.1146/annureveconomics-080217-053534

Miao, J., 2014. Introduction to economic theory of bubbles. Journal of Mathematical Economics 53, p. 130-136.

Miao, J., Wang, P., 2012. Bubbles and total factor productivity. American Economic Review: Papers and Proceedings 102, p. 82-87.

Miao, J., Wang, P., 2018. Asset bubbles and credit constraints. American Economic Review 108, p. 2590-2628.

Montrucchio, L., 2004. Cass transversality condition and sequential asset bubbles. Economic Theory 24, p. 645-663.

Pascoa, M.R., Petrassi, M., Torres-Martinez, J.P., 2011. Fiat money and the value of binding portfolio constraints. Economic Theory 46, p. 189-209.

46Santos, M. S., Woodford, M., 1997. Rational asset pricing bubbles. Econometrica 65, p. 19-57.

Scheinkman J. A., Weiss L., 1986. Borrowing constraints and aggregate economic activity. Econometrica 54 (1), p. 23{45.

Tirole, J., 1982. On the possibility of speculation under rational expectations. Econometrica 50, p. 1163-1181.

Tirole, J., 1985. Asset bubbles and overlapping generations. Econometrica 53, p. 1499-1528.

Townsend, R., 1980. Models of Money with Spatially Separated Agents. In: Kareken, J.H., Wallace, N., (Eds.) Models of Monetary Economics, Federal Reserve Bank of Minneapolis, p. 265-303.

Werner, J., 2014. Rational asset pricing bubbles and debt constraints. Journal of Mathematical Economics, vol. 53, p. 145-152.