Subject: Deflationary bubbles
From: Willem H. Buiter (willembuiter@btinternet.com)
Date: Sat Mar 25 2006 - 05:28:49 EST
LS,
Anne Sibert and I have just completed a comprehensive revision of our paper
"Deflationary Bubbles"(NBER Working Paper No. 10642), July 2004;
The Abstract is as follows:
"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 deflationary bubbles can and cannot exist. Our findings are
in contrast to the results in several prominent contributions to the
literature. We argue for particular specifications 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 deflationary
bubbles can and cannot occur. This result differs from that in other recent
works."
The revised paper can be found at: http://www.nber.org/~wbuiter/defbub.pdf
Willem H. Buiter
Professor of European Political Economy,
European Institute
London School of Economics and Political Science
24 Micheldever Road
London SE12 8LX
United Kingdom
Phone: + 44 (0)20 8318 4855
Mobile: 07961 909 314
E-mail: <mailto:willembuiter@btinternet.com> willembuiter@btinternet.com
Web: http://www.nber.org/~wbuiter/
