A note on rational speculative bubbles

Abstract

Diba and Grossman (1987) show that conditions which rule out certain deterministic bubbles, also rule out all rational stochastic bubbles of the form suggested by Blanchard and Watson (1982). The conditions appear to be fairly weak. Their conclusion, that if a bubble exists - a deterministic bubble, which cannot burst - it must have started at time zero, replicates a result contained in Sargent and Wallace (1973); a characteristic of all saddlepoint unstable systems. There is, as yet, no acceptable model which characterizes a speculative bubble; when, at any time t > 0, it begins, how long it persists. © 1989.