Switching bubbles: From Outside to Inside Bubbles Articles uri icon



publication date

  • August 2016

start page

  • 236

end page

  • 255


  • 87

International Standard Serial Number (ISSN)

  • 0014-2921

Electronic International Standard Serial Number (EISSN)

  • 1873-572X


  • The United States has recently experienced two asset price bubbles: the Dot-Corn and the Housing Bubbles. These bubbles had very different effects on investment and debt of manufacturing firms. In this paper I develop a framework to understand the differential effect of two types of rational bubbles. I distinguish between (i) Outside Bubbles, which I define as savers purchasing and selling costless assets not-attached to inputs of production and (ii) Inside Bubbles, which I define as savers buying an input of production (e.g., land or houses) only as a store of value. The model is an OLG economy with savers and entrepreneurs. Savers save to consume when they are old. Entrepreneurs can borrow to invest but they face a collateral constraint. In this environment, rational bubbles can emerge. I show that the size of an Inside Bubble is larger. I also find that when the economy switches from an Outside to an Inside Bubble, manufacturing (or non-housing) investment and debt is lower, consistent with the U.S. experience. Finally, I show that even though steady-state consumption is higher with an Outside Bubble, a social planner would prefer an Inside Bubble when the productivity of entrepreneurs is low. (C) 2016 Elsevier B.V. All rights reserved.


  • Economics


  • rational bubbles; collateral constraint; investment; debt; overlapping generations; economic-growth; housing bubbles; model