References (32)



Bubble Cycle

Masaya Sakuragawa

Tokyo Center for Economic Research (TCER); Keio University - Faculty of Economics

July 1, 2013

Tokyo Center for Economic Research (TCER) Paper No. E-55

This paper analyzes the boom–bust cycle driven by rational bubbles in an overlapping generations economy that is subject to borrowing constraints. At the heart of the analysis is the interplay among savings, investment, and the interest rate. Bubbles are more likely to crowd investment in, the stronger is the intertemporal substitution in consumption, and the more severe is the borrowing constraint. This model contradicts with Abel et al (1989)’s condition in both dimensions of dynamic efficiency and the occurrence of bubbles. We characterize the global dynamics of a stochastically bubbly economy, where emergent bubbles are followed by the investment boom, but the bursting of bubbles results in the recession. The recession is serious relative to the boom, with biased holding of bubbles.

Number of Pages in PDF File: 56

Keywords: Rational bubbles, crowding in, dynamic efficiency, stochastic bubbles

JEL Classification: E20, E32, E44

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Date posted: July 11, 2013  

Suggested Citation

Sakuragawa, Masaya, Bubble Cycle (July 1, 2013). Tokyo Center for Economic Research (TCER) Paper No. E-55. Available at SSRN: http://ssrn.com/abstract=2292527 or http://dx.doi.org/10.2139/ssrn.2292527

Contact Information

Masaya Sakuragawa (Contact Author)
Tokyo Center for Economic Research (TCER) ( email )
Sankyo Building
Room 703, Main Building
Chiyoda-ku, Tokyo, 1-7-10
Keio University - Faculty of Economics ( email )
2-15-45 Mita, Ninato-ku
Tokyo 1088345
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