The first part of this paper considers the interaction between productive and nonproductive savings in a growing economy. It employs an overlapping generations model with capital accumulation and various types of rents, and gives necessary and sufficient conditions for the existence of an aggregate bubble. The second part is a series of thoughts on the definition, nature, and consequences of asset bubbles. First, it derives some implications of bubbles for tests of asset pricing. Second, it demonstrates the specificity of money as

https://ms.mcmaster.ca/~grasselli/Tirole85.pdf

Asset bubbles and overlapping generations

Can extrinsic uncertainty ("animal spirits," "market psychology," "sunspots,"...) play a significant role in rational expectations equilibrium models? We establish that extrinsic uncertainty cannot matter in the static Arrow-Debreu economy with complete markets. But we also establish that extrinsic uncertainty can matter in the overlapping-generations economy with complete markets but where market participation is limited to those consumers alive when the markets are open. Equilibrium allocations in which extrinsic uncertainty plays no role are Pareto optimal in the traditional sense. Equilibrium allocations in which extrinsic uncertainty does play a role are Pareto optimal in a (weaker) sense which is appropriate to dynamic analysis.

Do Sunspots Matter

﻿LEAVING aside the courageous efforts of people around Monthly Review and Science and Society there has, by and large, been hardly any Marxist tradition among American intellectuals. However, during the last few years the situation has considerably changed and there is now a growing interest in Marxism, particularly among the younger social scientists of America. The book under review falls within this trend.

Value and Capital

Foundations of Economic Analysis

Let assets be denominated in an a priori specified numeraire. Whether or not the asset is complete, a competitive equilibrium exists as long as arbitrage is possible when assets are free. Generically, the set of competitive equilibria is finite, and the equilibrium prices and allocations in the commodity spot markets are uniquely determined by the asset allocation is generically constrained suboptimal: there exists an arbitrarily small reallocation of the existing assets, which leads to a Pareto improvement in welfare when prices and allocations in the commodity spot markets adjust to maintain equilibrium.

/pdf/existence-regularity-and-constrained-suboptimality-of-41nhr3u1r8.pdf

Existence, regularity, and constrained suboptimality of competitive allocations when the asset market is incomplete

The Overlapping-Generations Model, I: The Case of Pure Exchange without Money*

Foundations of the theory of general equilibrium

This paper presents an analysis of the structure of competitive equilibrium in a model whose principal feature is incomplete financial markets formulated in the spirit of Arrow. Specifically, the overall payoffs or returns from financial instruments are assumed to be fixed or predetermined, independently of the operation of the economy, and these instruments are assumed to be fewer in number than required to span all potential spot markets for commodities. Our main result establishes that market incompleteness generates a corresponding degree of allocation indeterminateness: Suppose there are N + 1 spot markets, but only 0< M < N (linearly independent) financial instruments, so that the deficiency in financial markets is 0 < n = N - M < N. Then, subject to some relatively innocuous technical qualifications, the set of equilibrium allocations contains a smooth, n-dimensional submanifold. We also indicate how real indeterminacy may increase when returns (for example, the market price and promised interest on an ordinary bond) are treated as variables rather than parameters.

Yves Balasko

Papers

The Overlapping-Generations Model, I: The Case of Pure Exchange without Money*

Foundations of the theory of general equilibrium

The structure of financial equilibrium with exogenous yields: the case of incomplete markets1

Existence of competitive equilibrium in a general overlapping-generations model☆

The structure of financial equilibrium with exogenous yields: The case of restricted participation