Deflationary bubbles

Willem Buiter and Anne C. Sibert

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In an attempt to clean up an unruly literature, we specify the necessary and sufficient conditions for household optimality in a model where money is the only …financial asset and provide the relevant proofs. We use our results to analyse when de‡flationary bubbles can and cannot exist. Our …findings are in contrast to the results in several prominent contributions to the literature. We argue for particular speci…cations of the no-Ponzi-game restrictions on the household’s and government’s intertemporal budget constraints in a model with money and bonds. Using the restriction on the household we derive the necessary and sufficient conditions for household optimality. The resulting equilibrium terminal conditions are then used to demonstrate that the existence of bonds does not affect when de‡flationary bubbles can and cannot occur. This result differs from that in other recent works.

Keywords: deflationary bubbles; optimizing monetary models; transversality conditions; intertemporal budget constraint (search for similar items in EconPapers)
JEL-codes: E31 E43 E63 (search for similar items in EconPapers)
Date: 2007-09
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Citations: View citations in EconPapers (5)

Published in Macroeconomic Dynamics, September, 2007, 11(4), pp. 431-454. ISSN: 1365-1005

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Related works:
Journal Article: DEFLATIONARY BUBBLES (2007)
Working Paper: Deflationary Bubbles (2006)
Working Paper: Deflationary Bubbles (2004)
Working Paper: Deflationary Bubbles (2004)
Working Paper: Deflationary Bubbles (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:3323

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