Asset Bubbles and Borrowing Constraints
38 Pages Posted: 10 May 2007
Date Written: February 26, 2007
Abstract
In this paper, we study the existence of asset bubbles in an overlapping generations economy `a la Tirole (1985) with borrowing constraints. Deriving a condition for the existence of equilibrium paths with bubbles, we demonstrate that (i) a monetary steady state (a steady state with bubbles) is constrained dynamically inefficient, whereas capital in the monetary steady state is underaccumulating relative to the quasi-golden rule, (ii) there exists a government intervention which corrects the constrained dynamic inefficiency, and (iii) for some parameter values, such a government intervention reduces the utilities of many agents, while it increases per capita consumption.
Keywords: Bubbles, Borrowing constraints, Heterogeneous agents, Constrained dynamic efficiency, Monetary policy
JEL Classification: E41, E51, O42
Suggested Citation: Suggested Citation
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