Bubbles and cycles in the Solow-Swan model
- Author(s)
- Gerhard Sorger
- Abstract
We consider a neoclassical one-sector economy in which-in addition to physical capital-there exists a second asset. This asset is unproductive, cannot be consumed, and does not pay dividends. A no-arbitrage condition is imposed so that the two assets are equivalent stores of value. Finally, we assume that consumption (respectively, investment) is a fixed fraction of the sum of aggregate factor income (GDP) and capital gains. In this modified Solow-Swan model, we characterize the conditions under which bubbles can exist, i.e., under which the useless asset can have a positive price. We find that these conditions do not imply that the original Solow-Swan equilibrium is dynamically inefficient, and we demonstrate that asset price bubbles can lead to non-monotonic and even periodic capital accumulation paths.
- Organisation(s)
- Department of Economics
- Journal
- Journal of Economics / Zeitschrift für Nationalökonomie
- Volume
- 127
- Pages
- 193-221
- No. of pages
- 29
- ISSN
- 0931-8658
- DOI
- https://doi.org/10.1007/s00712-018-0638-9
- Publication date
- 08-2019
- Peer reviewed
- Yes
- Austrian Fields of Science 2012
- 502018 Macroeconomics
- Keywords
- ASJC Scopus subject areas
- Economics and Econometrics, Business, Management and Accounting(all)
- Portal url
- https://ucris.univie.ac.at/portal/en/publications/bubbles-and-cycles-in-the-solowswan-model(c8e7892f-a51a-4ed6-9489-cc1102777917).html