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Bubbles in Stochastic Economies: Can They Cure Overaccumulation of Capital?

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  • Mathias Binswanger

Abstract

It is well known that bubbles possess the potential to increase economic welfare due to a reduction of capital accumulation in deterministic overlapping generations economies that are in a dynamically inefficient state. However, actual economies are stochastic, where the concept of dynamic efficiency has turned out to be a complex issue. This paper contributes in two ways. First, the model presented in this paper establishes that dynamic inefficiency is not a necessary condition for deterministic bubbles in a stochastic economy. Second, a simulation shows that although bubbles are unable to persist in the stochastic steady state, they can still cure overaccumulation of capital for a time long enough to cover agents’ relevant time horizon. Copyright Springer-Verlag Wien 2005

Suggested Citation

  • Mathias Binswanger, 2005. "Bubbles in Stochastic Economies: Can They Cure Overaccumulation of Capital?," Journal of Economics, Springer, vol. 84(2), pages 179-202, March.
    • Handle: RePEc:kap:jeczfn:v:84:y:2005:i:2:p:179-202
    DOI: 10.1007/s00712-004-0102-x
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    Keywords

    bubbles; dynamic efficiency; capital overaccumulation; stochastic OLG model; D61; E44;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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