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Bubbly Markov equilibria

Author

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  • Martin Barbie

    (University of Cologne)

  • Marten Hillebrand

    (Goethe University Frankfurt)

Abstract

Bubbly Markov equilibria (BME) are recursive equilibria on the natural state space which admit a non-trivial bubble. The present paper studies the existence and properties of BME in a general class of overlapping generations economies with capital accumulation and stochastic production shocks. Using monotone methods, we develop a general approach to construct Markov equilibria and provide necessary and sufficient conditions for these equilibria to be bubbly. Our main result shows that a BME exists whenever the bubbleless equilibrium is Pareto inefficient due to either overaccumulation of capital or inefficient risk sharing between generations.

Suggested Citation

  • Martin Barbie & Marten Hillebrand, 2018. "Bubbly Markov equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(3), pages 627-679, October.
    • Handle: RePEc:spr:joecth:v:66:y:2018:i:3:d:10.1007_s00199-017-1082-8
    DOI: 10.1007/s00199-017-1082-8
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    Cited by:

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    3. Tomohiro Hirano & Alexis Akira Toda, 2023. "Bubble Necessity Theorem," CIGS Working Paper Series 23-011E, The Canon Institute for Global Studies.
    4. Bosi, Stefano & Le Van, Cuong & Pham, Ngoc-Sang, 2022. "Real indeterminacy and dynamics of asset price bubbles in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 100(C).
    5. David G. Green, 2023. "Emergence in complex networks of simple agents," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(3), pages 419-462, July.
    6. Rabah Amir, 2018. "Special issue: supermodularity and monotone methods in economics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(3), pages 547-556, October.
    7. Bloise, Gaetano & Polemarchakis, Herakles & Vailakis, Yiannis, 2018. "Sustainable Debt," The Warwick Economics Research Paper Series (TWERPS) 1178, University of Warwick, Department of Economics.
    8. Chattopadhyay, Subir, 2018. "The unit root property and optimality with a continuum of states—Pure exchange," Journal of Mathematical Economics, Elsevier, vol. 78(C), pages 105-118.

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    More about this item

    Keywords

    Asset bubbles; Stochastic OLG; Production; Markov equilibria; Pareto optimality;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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