Bubbly Markov equilibria

Abstract

Bubbly Markov Equilibria (BME) are recursive equilibria on the natural state space which admit a non-trivial bubble. The present paper studies the existence and properties of BME in a general class of overlapping generations (OLG) economies with capital accumulation and stochastic production shocks. Using monotone methods, we develop a general approach to construct Markov equilibria and provide necessary and sufficient conditions for these equilibria to be bubbly. Our main result shows that a BME exists whenever the bubbleless equilibrium is Pareto inefficient either due to overaccumulation of capital or inefficient risksharing between generations.

The unit root property and optimality with a continuum of states—Pure exchange

“…In doing so the state space for capital becomes endogenous and, although they restrict attention to stationary allocations on a compact state space that are described by continuous functions that are uniformly positive, they are unable to obtain a characterization result. Barbie and Hillebrand (2017) extend the recursive approach (developed in Barbie and Kaul (2015) for pure exchange economies) to production economies to analyze stationary allocations that are continuous and uniformly positive on an endogenous state space and obtain conditions that are similar in spirit to the conditions in Manuelli (1990) but fall short of a characterization result.…”

Special issue: supermodularity and monotone methods in economics

“…The remaining six papers consider various economic applications, which may be classified into two broad groups. The first of these deals with dynamic general equilibrium and overlapping generations models within macroeconomic dynamics (Datta et al 2018; Barbie and Hillebrand 2018). The second group of papers consists of studies in industrial organization (Cosandier et al 2018; Reynolds and Rietzke 2018) and applied microeconomic theory (Dekel and Pauzner 2018).…”