Deflationary bubbles

Buiter, Willem H. and Sibert, Anne C. (2007) Deflationary bubbles. Macroeconomic Dynamics, 11 (4). pp. 431-454. ISSN 1365-1005

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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 analyse when de‡flationary bubbles can and cannot exist. Our …findings are in contrast to the results in several prominent contributions to the literature. We argue for particular speci…cations of the no-Ponzi-game restrictions on the household’s and 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 de‡flationary bubbles can and cannot occur. This result differs from that in other recent works.

Item Type:	Article
Official URL:	http://journals.cambridge.org/action/displayJourna...
Additional Information:	© 2007 Cambridge University Press
Divisions:	European Institute
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level; Inflation; Deflation
Date Deposited:	12 Feb 2008
Last Modified:	11 Dec 2024 23:12
URI:	http://eprints.lse.ac.uk/id/eprint/3323

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