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THE SPIRIT OF CAPITALISM AND RATIONAL BUBBLES

Published online by Cambridge University Press:  30 June 2015

Ge Zhou
Ge Zhou*
Affiliation:
College of Economics and Academy of Financial Research, Zhejiang University
*
Address correspondence to: Ge Zhou, No. 123 Mailbox, College of Economics, Building Waijingmao, 38 Zheda Road, Hangzhou, Zhejiang, China; e-mail: flhszh@gmail.com.
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Abstract

This study provides an infinite-horizon model of rational bubbles in a production economy. A bubble can arise when the pursuit of status is modeled explicitly, capturing the notion of “the spirit of capitalism.” Using a parameterized model, I demonstrate the specific conditions for the existence of bubbles and their implications. Bubbles crowd out investment, stimulate consumption, and slow economic growth. I also discuss a stochastic bubble that bursts with an exogenous probability. I show that there could be multiple stochastic bubbly equilibria. Moreover, I suggest that taxing wealth properly can eliminate bubbles and achieve the social optimum.

Keywords

BubblesSpirit of CapitalismMultiple EquilibriaWealth Tax
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 6 , September 2016 , pp. 1432 - 1457
Copyright
Copyright © Cambridge University Press 2015 

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