Intertemporal equilibrium with financial asset and physical capital

Abstract

We build an infinite-horizon dynamic deterministic general equilibrium model with imperfect markets (because of borrowing constraints), in which heterogeneous agents invest in capital or/and financial asset, and consume. There is a representative firm who maximizes its profit. Firstly, the existence of intertemporal equilibrium is proved even if aggregate capital is not uniformly bounded. Secondly, we study the interaction between the financial market and the productive sector. We also explore the nature of physical capital bubble and financial asset bubble as well.

Intertemporal equilibrium with physical capital and financial asset: Role of dividend taxation

“…Indeed, with such a fluctuation, at any date there is at least one agent who needs to buy asset (even when the asset price exceeds the fundamental value) because this agent has to transfer her wealth from this date to the next date (this is the only way she can smooth consumption because she is prevented from borrowing). 7 Our paper is different from Le Van and Pham (2016) because the asset's fundamental value in our model is not monotonic in dividends while, in Le Van and Pham (2016), it is monotonic. The reason is that we introduce a dividend taxation which makes the real returns and discount factors in our example depend on dividends through productive government investment.…”

“…Our model is based on Santos and Woodford (1997), Le Van and Pham (2016). We consider a deterministic infinite-horizon general equilibrium model à la Ramsey with three types of agents: a representative firm without market power, m heterogeneous households and a government.…”

“…We consider a deterministic infinite-horizon general equilibrium model à la Ramsey with three types of agents: a representative firm without market power, m heterogeneous households and a government. With respect to Le Van and Pham (2016), we introduce a government who imposes a dividend tax and uses it to finance productive government spending which in turn improves the productivity of firms.…”

“…As recognized by Santos and Woodford (1997), Kocherlakota (2008), andBosi et al (2022), it is not easy to find a general equilibrium model with bubbles. We present here a tractable model, inspired by Section 6.1 in Le Van and Pham (2016), where bubbles may arise and look at the role of dividend taxation. We will work under the following assumption.…”

“…On the one hand, the financial market having financial frictions may amplify the macroeconomic impacts of exogenous changes (Kiyotaki and Moore, 1997), and, in some cases, it is considered as a source of economic recession. On the other hand, Le Van and Pham (2016) point out that the key factor to prevent recessions is the productivity of the production sector and that financial assets may be beneficial to the productive sector by providing financial support for the purchase of physical capital.…”