Bursting Bubbles in a Macroeconomic Model

2025-01-14

AI Summary

This paper investigates the formation, evolution, and collapse mechanisms of rational stock market bubbles driven by technological spillovers. Addressing the transition of knowledge spillovers from disequilibrium to equilibrium, it constructs the first macro-finance unified framework that endogenizes stochastic bubbles within intangible capital accumulation and innovation-driven spillovers, employing a dynamic general equilibrium model coupled with stochastic differential equations. The study rigorously derives necessary and sufficient conditions for bubble existence, quantifies bubble deviations from fundamental prices, and proves such deviations constitute transient disequilibrium phenomena with endogenous collapse inevitability. Results show that although bubbles inevitably burst, their persistence significantly amplifies technological innovation, yielding permanent increases in output and wages. The core contribution lies in identifying the structural origins of bubbles in intangible capital formation and establishing their positive growth effects.

Technology Category

• Game Theory and Economic Paradigms: Equilibrium
• Multiagent Systems: Mechanism Design
• Reasoning under Uncertainty: Stochastic Optimization

Application Category

• Economics, Online Markets and Human Computation: Sustainability of Web economics
• Web Mining and Content Analysis: Models for Web evolution
• Responsible Web: Social and technical mechanisms of refusal for web technologies and applications

Abstract

This paper identifies the conditions and mechanisms that give rise to stochastic bubbles that are expected to collapse. To illustrate the essence of the emergence of stochastic bubbles, we first present a toy model, and then we present a full-fledged macro-finance model of intangible capital and show that stochastic stock bubbles attached to intangible capital emerge in the process of spillover of technological innovation. We show that the dynamics with stochastic bubbles, which is characterized by unbalanced growth, is a temporary deviation from a balanced growth path in which asset prices equal the fundamentals.

Problem

• Modeling rational stock bubbles with innovation and knowledge spillovers
• Analyzing bubble-technology interdependence despite inevitable collapse
• Examining unbalanced-to-balanced growth transition through knowledge diffusion

Innovation

• Macro-finance model with knowledge spillover
• Rational stock bubble emerging despite collapse
• Bubble and innovation reinforce for higher output