To Bubble or Not to Bubble: Asset Price Dynamics and Optimality in OLG Economies

Pham, Ngoc Sang and Le Van, Cuong and Bosi, Stefano (2025): To Bubble or Not to Bubble: Asset Price Dynamics and Optimality in OLG Economies.

Abstract

We study an overlapping generations (OLG) exchange economy with an asset that yields dividends. First, we derive general conditions, based on exogenous parameters, that give rise to three distinct scenarios: (1) only bubbleless equilibria exist, (2) a bubbleless equilibrium coexists with a continuum of bubbly equilibria, and (3) all equilibria are bubbly. Under stationary endowments and standard assumptions, we provide a complete characterization of the equilibrium set and the associated asset price dynamics. In this setting, a bubbly equilibrium exists if and only if the interest rate in the economy without the asset is strictly lower than the population growth rate and the sum of per capita dividends is finite. Second, we establish necessary and sufficient conditions for Pareto optimality. Finally, we investigate the relationship between asset price behaviors and the optimality of equilibria.

• Item Type: MPRA Paper
• Language: English
• Keywords: exchange economy, overlapping generations, asset price bubble, fundamental value, low interest rate, Pareto optimal
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling; D - Microeconomics > D5 - General Equilibrium and Disequilibrium; D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; 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

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