Working Paper: CEPR ID: DP14367
Authors: Robert Kollmann
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: rational bubbles; boom-bust cycles; business cycles in closed and open economies; nonlinear DSGE models; Long-Plosser model; Dellas model
JEL Codes: E1; E3; F3; F4; C6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of transversality condition (TVC) (D10) | multiple equilibria (D50) |
| multiple equilibria (D50) | rational bubbles (E32) |
| rational bubbles (E32) | persistent fluctuations in real activity (E32) |
| bounded rational bubbles (E32) | recurrent boom-bust cycles (E32) |
| international financial integration (F30) | synchronization of business cycles (F44) |