Portfolio constraints, differences in beliefs and bubbles

Introduction to financial frictions and debt constraints

“…But then under rational expectations inter temporally optimizing agents will not choose a financial wealth that becomes too large with respect to their future consumption, thus ruling out bubbles. Bidian [9] therefore extends the initial result of Santos and Woodford [34] showing the universality of low interest rates for the existence of rational bubbles. 13 He also proves that heterogeneous beliefs and asymmetric information are not crucial ingredients in the mechanism that generates bubbles.…”

“…To avoid insolvency of public debt, they assume a debt constraint defined as a constant ratio of debt over GDP. 9 This ratio is considered as a policy parameter fixed by the government. As in Schmitt-Grohé and Uribe [35], the tax rate adjusts at each period to fulfill the intertemporal budget constraint of the government.…”

“…Depending on the model considered, the literature has basically identified three main sources of frictions that may generate bubbles: heterogeneous beliefs, asymmetric information and portfolio constraints. 11 In the paper contained in this special section, Bidian [9] provides a unified framework for the analysis of bubbles in which these three sources of frictions can be considered simultaneously. In particular, he considers a wide class of portfolio constraints that admits as particular cases borrowing constraints, debt constraints, short sale constraints, margin requirements, ....…”

“…In particular, he considers a wide class of portfolio constraints that admits as particular cases borrowing constraints, debt constraints, short sale constraints, margin requirements, .... Being able to consider at the same time all these possible sources of bubbles, Bidian [9] can identify the main driving mechanism at the core of the existence of overvalued assets.…”

“…The main conclusion of Bidian's [9] is to prove in a very general framework that the existence of rational bubbles requires agents to have a sufficiently low demand for credits that generates low interest rates. 12 In such configuration, the present value of aggregate endowment becomes infinite allowing the existence of bubbles.…”