Working Paper Series in Economics, Karlsruher Institut für Technologie (KIT) 57
The paper develops a dynamical systems approach to study asset bubbles in OLG economies with stochastic production. We derive necessary and sufficient conditions for bubbly equilibria to exist and chracterize the maximum sustainable bubble. Even if they exist, bubbles are temporary and the economy converges to a bubbleless equilibrium with probability one. We also demonstrate that the existence conditions can be relaxed if frictions such as borrowing constraints are introduced.
asset bubbles OLG stochastic production capital accumulation dynamical systems borrowing constraints