Skip to main content
×
Home
    • Aa
    • Aa

DEFLATIONARY BUBBLES

  • WILLEM H. BUITER (a1) and ANNE C. SIBERT (a2)
Abstract

In an attempt to clean up an unruly literature, we specify the necessary and sufficient conditions for household optimality in a model where money is the only financial asset and provide the relevant proofs. We use our results to analyze when deflationary bubbles can and cannot exist. Our findings are in contrast to the results in several prominent contributions to the literature. We argue for particular specifications of the no-Ponzi-game restrictions on the representative household's and the government's intertemporal budget constraints in a model with money and bonds. Using the restriction on the household we derive the necessary and sufficient conditions for household optimality. The resulting equilibrium terminal conditions are then used to demonstrate that the existence of bonds does not affect when deflationary bubbles can and cannot occur. This result differs from that in other recent works.

Copyright
Corresponding author
Address correspondence to: Anne C. Sibert, School of Economics, Mathematics and Statistics, Birkbeck College, Malet Street, London WCIE 7HX, United Kingdom; e-mail: asibert@econ.bbk.ac.uk.
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

BenhabibJess, StephanieSchmitt-Grohé, and MartinUribe2001Monetary policy and multiple equilibria. American Economic Review91, 167186.

BenhabibJess, StephanieShmitt-Grohé, and MartinUribe2002aAvoiding liquidity traps. Journal of Political Economy110, 535563.

BenhabibJess, StephanieSchmitt-Grohé, and MartinUribe2002bChaotic interest rates. American Economic Review92, 7278.

BrockW. A.1974Money and growth: The case of long run perfect foresight. International Economic Review15, 750777.

BrockWilliam A.1975A simple perfect foresight monetary model. Journal of Monetary Economics1, 133150.

BrockWilliam A. and Stephen J.Turnovsky, 1981The analysis of macroeconomic policies in a perfect foresight equilibrium. International Economic Review22, 179209.

BuiterWillem H.2003Helicopter Money: Irredeemable Fiat Money and the Liquidity Trap. NBER Working Paper 10163.

CanzoneriMatthew B., Robert E.Cumby, and Behzad T.Diba2001Is the price level determined by the needs of fiscal solvency. American Economic Review91, 12211238.

EkelandIvar and José A.Scheinkman1986Transversality conditions for some infinite horizon discrete time optimization problems. Mathematics of Operations Research11, 216229.

GrayJo Anna1984Dynamic instability in rational expectations models: an attempt to clarify. International Economic Review25, 93122.

KamihigashiTakashi2000A simple proof of Ekeland and Scheinkman's result on the necessity of a transversality condition. Economic Theory15, 463468.

MatsuyamaKiminori1991Endogenous price fluctuations in an optimizing model of a monetary economy. Econometrica59, 16171632.

McCallumBennett T.1983On non-uniqueness in rational expectations models: An attempt at perspective. Journal of Monetary Economics11, 139168.

McCallumBennett T.2001Indeterminacy, bubbles, and the fiscal theory of price level determination. Journal of Monetary Economics47, 1930.

ObstfeldMaurice and KennethRogoff1983Speculative hyperinflations in maximizing models: Can we rule them out? Journal of Political Economy91, 675687.

ObstfeldMaurice and KennethRogoff1986Ruling out divergent speculative bubbles. Journal of Monetary Economics17, 346362.

TrehanBharat and Carl E.Walsh1988Common trends, the government's budget constraint and revenue smoothing. Journal of Economic Dynamics and Control12, 425444.

WeilPhilippe1991Is money net wealth? xInternational Economic Review32, 3753.

WeitzmanMartin L.1973Duality theory for infinite horizon convex models. Management Science19, 783789.

WilcoxDavid W.1989Sustainability of government budget deficits: Implications of the present value borrowing constraint. Journal of Money, Credit and Banking21, 291306.

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Keywords:

Metrics

Altmetric attention score

Full text views

Total number of HTML views: 1
Total number of PDF views: 11 *
Loading metrics...

Abstract views

Total abstract views: 88 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 24th May 2017. This data will be updated every 24 hours.