WP Global Economy 2023.07.06
This is a working paper.
Asset price bubbles are situations where asset prices exceed the fundamental values defined by the present value of dividends. This paper presents a conceptually new perspective: the necessity of asset price bubbles. We establish the Bubble Necessity Theorem in a plausible general class of economic models: with faster long run economic growth (G) than dividend growth (Gd) and counterfactual long run autarky interest rate (R) below dividend growth, all equilibria are bubbly with non-negligible bubble sizes relative to the economy. The bubble necessity condition R < Gd < G naturally arises in multi-sector economies with uneven productivity growth with sufficiently high savings motive.
Keywords: bubble, fundamental value, possibility versus necessity.
JEL codes: D53, G12.