Title
The Spirit of Capitalism, Stock Market Bubbles, and Output Fluctuations
Abstract
This paper presents a representative agent model in which stock market
bubbles cause output fluctuations. Assuming that utility depends
directly on wealth, we show that stock market bubbles arise if the marginal
utility of wealth does not decline to zero as wealth goes to infinity.
Bubbles may affect output positively or negative depending on whether the
production function exhibits increasing or decreasing returns to scale.
In sunspot equilibria, the bursting of a bubble is followed by a sharp
decline in output one period later. Various numerical examples are
given to illustrate the behavior of stochastic bubbles and the relationship
between bubbles and output.
Keywords: Spirit of capitalism, stock market bubbles, output fluctuations, wealth in utility, sunspot equilibria
JEL Classification: E20, E32
Takashi KAMIHIGASHI
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501
Japan
Phone: (81) 78 803 7036
Fax: (81) 78 803 7059