Wealth Preference and Rational Bubbles

Abstract

We consider a neoclassical economy where households derive utility from holding wealth. We show that, under some conditions, there can be rational bubbles. Hence, we provide a microfoundation for bubbles that relies on a frictionless in…nitehorizon economy without any heterogeneity across households. While our bubbly equilibria are very similar to those obtained by Tirole (1985) in an overlapping generation economy, the underlying economics is di¤erent. Turning to public debt, we show that Ponzi schemes can be sustainable. Hence, in general, the limit on the accumulation of public debt by the government is not given by its no-Ponzi condition but, instead, by the representative household's transversality condition. The Ricardian equivalence must hold in any of our equilibria. Finally, in the presence of money, the real equilibrium structure of the economy remains unchanged. We carefully investigate the e¤ects of helicopter drops of money on the possibility of Ponzi schemes and of speculative hyperin ‡ation or de ‡ation.

Resolving New Keynesian Anomalies with Wealth in the Utility Function

“…3 The wealth-in-the-utility assumption has been found useful in models of long-run growth (Kurz, 1968;Konrad, 1992;Zou, 1994;Corneo & Jeanne, 1997;Futagami & Shibata, 1998), risk attitudes (Robson, 1992;Clemens, 2004), asset pricing (Bakshi & Chen, 1996;Gong & Zou, 2002;Kamihigashi, 2008;Michau et al, 2018), life-cycle consumption (Zou, 1995;Carroll, 2000;Francis, 2009;Straub, 2019), social stratification (Long & Shimomura, 2004), international macroeconomics (Fisher, 2005;Fisher & Hof, 2005), financial crises (Kumhof et al, 2015), and optimal taxation (Saez & Stantcheva, 2018). Such usefulness lends further support to the assumption.…”

The Credit Card Debt Puzzle: New Facts and Theory

“…Early economists, such as David Hume, Adam Smith, John Maynard Keynes and Irving Fisher believed that people valued wealth as an end in itself. Recent literature also assumes wealth has a value in its own right, for example, secular stagnation Michau (2018); Ono (2015), rational bubbles (Michau, Ono, and Schlegl, 2018), and the savings of the rich, (Carroll, 1998). 3 Pain of payment has long been discussed in behavioural research (e.g., Massenot (2021), Loewenstein and Prelec (1998), and Quispe-Torreblanca, Stewart, Gathergood, and Loewenstein (2019).…”