Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies

61 Pages Posted: 11 Feb 2020 Last revised: 2 Mar 2020

See all articles by Robert Kollmann

Robert Kollmann

ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)

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Date Written: January 2020

Abstract

This paper studies rational bubbles in non-linear dynamic general equilibrium models of the macroeconomy. The term 'rational bubbles' refers to multiple equilibria arising from the absence of a transversality condition (TVC) for capital. The lack of TVC can be due to an overlapping generations structure. Rational bubbles reflect self-fulfilling fluctuations in agents' expectations about future investment. In contrast to explosive rational bubbles in linearized models (Blanchard (1979)), the rational bubbles in non-linear models here are stable and bounded. Bounded bubbles can generate persistent fluctuations of real activity, and capture key business cycle stylized facts. Both closed and open economies are analyzed. In a non-linear two-country model with integrated financial markets, bubbles must be perfectly correlated across countries.

Keywords: Boom-bust cycles, business cycles in closed and open economies, Dellas model, Long-Plosser model, non-linear DSGE models, Rational bubbles

JEL Classification: C6, E1, E3, F3, F4

Suggested Citation

Kollmann, Robert, Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies (January 2020). CEPR Discussion Paper No. DP14367, Available at SSRN: https://ssrn.com/abstract=3535452

Robert Kollmann (Contact Author)

ECARES, Université Libre de Bruxelles ( email )

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University of Paris XII - Department of Economics ( email )

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France

HOME PAGE: http://www.robertkollmann.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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