Working Paper: NBER ID: w29745
Authors: Tomohiro Hirano; Joseph E. Stiglitz
Abstract: This paper examines the global macro-dynamics of an OLG model with capital and land with rational expectations. Through the interactions between capital accumulation and land prices, the economy experiences phase transitions, endogenously moving back and forth from situations with unique and multiple momentary equilibria. Consequently, there can be a plethora of rational expectation equilibria trajectories, without any smooth convergence properties, neither converging to a steady state or even to a limit cycle—what we call “wobbly” macro-dynamics. The price of land and other key macro variables (wages, interest rates, output, consumption, wealth, capital stock) endogenously fluctuate within a well-identified range with repeated boom-bust cycles. The key disturbance to the economy is endogenous; even with rational expectations, there can be real estate booms, with increasing land prices increasingly crowding out productive investments; but such unsustainable land price booms inevitably are followed by a crash. We analyze the set of parameter values for which wobbly fluctuations occur, show that with some parameter values, the only r.e. trajectories involve such wobbly dynamics, demonstrate how changes in parameters affect global macro-dynamics, and show how policy interventions can affect stability and social welfare.
Keywords: land speculation; macroeconomic stability; overlapping generations model; rational expectations; economic fluctuations
JEL Codes: C61; E22; E32; G12; G18; H21; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| land speculation (R52) | macroeconomic instability (E60) |
| land prices (R31) | macroeconomic instability (E60) |
| land prices (R31) | boom-bust cycles (E32) |
| increasing land prices (R31) | higher interest rate (E43) |
| higher interest rate (E43) | land prices (R31) |
| rising land prices (R31) | decreased capital accumulation (E22) |
| decreased capital accumulation (E22) | rising land prices (R31) |
| land prices (R31) | multiple momentary equilibria (D50) |
| multiple momentary equilibria (D50) | wobbly dynamics (C69) |
| endogenous expectations (D84) | fluctuations in land prices (E30) |
| crossing critical thresholds (C24) | crashes in land prices (R31) |