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