Wealth Preference and Rational Bubbles

56 Pages Posted: 28 Aug 2018

See all articles by Jean-Baptiste Michau

Jean-Baptiste Michau

Ecole Polytechnique, Paris

Yoshiyasu Ono

Osaka University - Institute of Social and Economic Research (ISER)

Matthias Schlegl

Ludwig Maximilian University of Munich, Faculty of Economics

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Date Written: July 16, 2018

Abstract

We consider a neoclassical economy where households derive utility from holding wealth. We show that, under some conditions, there can be rational bubbles. Hence, we provide a microfoundation for bubbles that relies on a frictionless infinite-horizon economy without any heterogeneity across households. While our bubbly equilibria are very similar to those obtained by Tirole (1985) in an overlapping generation economy, the underlying economics is different. Turning to public debt, we show that Ponzi schemes can be sustainable. Hence, in general, the limit on the accumulation of public debt by the government is not given by its no-Ponzi condition but, instead, by the representative household’s transversality condition. The Ricardian equivalence must hold in any of our equilibria. Finally, in the presence of money, the real equilibrium structure of the economy remains unchanged. We carefully investigate the effects of helicopter drops of money on the possibility of Ponzi schemes and of speculative hyperinflation or deflation.

Keywords: Ponzi scheme, rational bubble, wealth preference

JEL Classification: E130, E440, G120

Suggested Citation

Michau, Jean-Baptiste and Ono, Yoshiyasu and Schlegl, Matthias, Wealth Preference and Rational Bubbles (July 16, 2018). CESifo Working Paper Series No. 7148. Available at SSRN: https://ssrn.com/abstract=3237991

Jean-Baptiste Michau

Ecole Polytechnique, Paris ( email )

1 rue Descartes
Paris, 75005
France

Yoshiyasu Ono (Contact Author)

Osaka University - Institute of Social and Economic Research (ISER) ( email )

6-1 Mihogaoka
Ibaraki, Osaka 567-0047
Japan

Matthias Schlegl

Ludwig Maximilian University of Munich, Faculty of Economics ( email )

Germany

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