Saturday, October 23, 2010

Bubbles course

As part of my sabbatical duties here in Paris, I agreed to give a graduate course on asset price bubbles.

The course started on October 15th, and in the first lecture I discussed the theory of "rational bubbles", that is to say, bubbles that can arise in a well defined rational expectations model, simply for being a possible solution of the corresponding homogeneous Euler equation (apart from the usual "fundamental value" term, which is a particular solution associated with the inhomogenous equation with dividends).

The catch is that the expected value of such rational bubbles must grow exponentially, so they are typically ruled out by some "transversality" condition (such as constraints in the total wealth in the economy). Nevertheless, they are a good place to start studying bubbles, if only because the "irrational" ones are much more difficult to characterize.

I'll be using this page to post references for the course as it progresses. Eventually there might be slides or even notes available, but don't create any expectation (rational or otherwise) about them.

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