Dynamic Analysis of Non-self-fulfilling Bubbles in an Overlapping Generations Economy

The purpose of this paper is to formulate the growth process of asset bubbles which is consistent with actual experiences of bubbles characterized by the emergence, expansion, and sudden crash and to analyze its effects on dynamic aspects of the economy. We show that if we remove the assumption of perfect foresight of all agents from the standard model of rational self-fulfi lling bubbles, such a growth process of bubbles, which we call “non-self-fulfi lling bubbles”, can be formulated. We also investigate the endogenous timing of the crash of non-self-fulfi lling bubbles, growth and welfare effects of them, and a public policy which cuts the duration of the process of non-self-fulfi lling bubbles short