Confidence and the Real Value of Money in an Overlapping Generations Economy

Abstract

We demonstrate that stochastic bubbles which have a constant, exogenous, probability of collapsing may exist, in general equilibrium, on an intrinsically useless and unbacked asset (money). This may happen provided that the probability q that the bubble will persist next period is large enough and exceeds a threshold level Q which we call the minimum rate of confidence. This condition is always violated when the economy without bubble is dynamically efficient. It is more likely to be satisfied, in dynamically inefficient economies, the larger the “size” of the inefficiency (as measured by the excess of the growth rate over the no-bubble interest rate). We study both exchange and production economies.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 210 citations exist upstream.