Injecting rational bubbles |
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Authors: | Narayana Kocherlakota |
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Affiliation: | Department of Economics, University of Minnesota, Minneapolis, MN 55455, USA, Federal Reserve Bank of Minneapolis, NBER |
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Abstract: | This paper proves two theorems about economies with a finite number of infinitely lived agents who trade a complete set of one-period Arrow securities and several infinitely lived securities at each date, subject to short-sales constraints. The first theorem in the paper considers an equilibrium to an economy of this kind. It proves that there exists another economy with perturbed short-sales constraints in which there is an allocation-equivalent equilibrium in which asset prices have a bubble. The second theorem extends to the result to the case in short-sales constraints are endogenously determined in the sense of Alvarez and Jermann [Efficiency, equilibrium, and asset pricing with risk of default, Econometrica 68 (2000) 775-797]. |
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Keywords: | G12 |
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