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Are speculative bubbles welfare improving? A note on Wang and Wen (2012)

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  • Fausch, Jürg
  • Sigonius, Markus

Abstract

Wang and Wen (2012) show in a DSGE model that the existence of speculative bubbles are welfare improving. In their steady state analysis of the benchmark model the authors claim the existence of a unique steady state in the bubble equilibrium with a higher capital stock and hence higher output compared to the fundamental equilibrium. This is due to higher investment efficiency because firms can use bubble assets as a store of value when they are hit by an adverse investment shock. In this note we demonstrate that this claim is at odds with our finding of the existence of an additional, less favorable, steady state in the bubble equilibrium. In the new steady state, allocations are very similar to the steady state without bubbles, which implies a deterioration of investment efficiency, if the economy is in the new, less favorable bubble steady state.

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  • Fausch, Jürg & Sigonius, Markus, 2020. "Are speculative bubbles welfare improving? A note on Wang and Wen (2012)," Economics Letters, Elsevier, vol. 190(C).
    • Handle: RePEc:eee:ecolet:v:190:y:2020:i:c:s0165176520300756
    DOI: 10.1016/j.econlet.2020.109076
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    References listed on IDEAS

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    1. Costas Azariadis & Roger Guesnerie, 1986. "Sunspots and Cycles," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(5), pages 725-737.
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    3. Benhabib, Jess, 1998. "Introduction to Sunspots in Macroeconomics," Journal of Economic Theory, Elsevier, vol. 81(1), pages 1-6, July.
    4. Pengfei Wang & Yi Wen, 2012. "Speculative Bubbles and Financial Crises," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 184-221, July.
    5. Jianjun Miao & Zhouxiang Shen & Pengfei Wang, 2019. "Monetary Policy and Rational Asset Price Bubbles: Comment," American Economic Review, American Economic Association, vol. 109(5), pages 1969-1990, May.
    6. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
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    Cited by:

    1. Zhang, Xiaoming & Wei, Chunyan & Lee, Chien-Chiang & Tian, Yiming, 2023. "Systemic risk of Chinese financial institutions and asset price bubbles," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    Asset pricing; Boom-bust cycle; Financial crisis; Speculative bubble; Sunspot;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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