Asset bubbles and borrowing constraints

In this paper, we study the existence of asset bubbles in an overlapping generations economy a la Tirole [Tirole, J., 1985. Asset bubbles and overlapping generations. Econometrica 53, 1499-1528] with borrowing constraints. Deriving a condition for the existence of equilibrium paths with bubbles, we demonstrate that (i) a monetary steady state (a steady state with bubbles) is constrained dynamically inefficient, whereas capital in the monetary steady state is underaccumulating relative to the quasi-golden rule, (ii) there exists a government intervention which corrects the constrained dynamic inefficiency, and (iii) for some parameter values, such a government intervention reduces the utilities of agents with high productivity, while it increases per capita consumption. (C) 2007 Elsevier B.V. All rights reserved.