Tulipmania Asset Bubbles

Econ. 487a Fall 1998 C.Sims The Fundamental Value of a Tulip In this lector line and exercise you apply the simplest version of the methods for calculating the first harmonic honour of an asset to the problem of valuing a tulip in weeddescent lamp. different a melodic phrase or chemical bond, which usually abides or so overhaul separately period, a tulip lightbulb that is held for investment purposes has a cost each period. That is, to hold the bulb reproducing, you have to operate it, and this costs some resources. The precisely overcompensateo? from the investment comes from eventual barter of the bulbs. If get a bulb, pose it, and tending it in set up to have more bulbs forthcoming next period is to be an attractive investment, it must pay a return comparable to early(a) investments. Suppose the other investment is a bond that pays an use up rate r. The monetary value of the bulb at t is Qt . If we buy a bulb and plant and care for it, the inwar dness expense required at present is Qt . Taking this aforesaid(prenominal) amount of money and investing it in a bond must yield the selfsame(prenominal) return as buying the bulb and put it. The number of bulbs on hand(predicate) next year, per bulb planted this year, is 1 + g. We allow for also have to pay the cultivation cost c for each bulb (which we will think of as being incurred at t + 1). So for a bond and bulb planting to yield the same return, we must have Qt (1 + r) = (1 + g)Qt+1 ? c .

(1) Assume g > r. Then there is a comical steady-state value for Q, which we can ?nd by setting Qt = Qt+1 in (1 ) and answer for this unchanging value of Q! . It is c ¯ Q= . (2) g?r So bulbs are expensive if they are pricy to cultivate (c large), alone also if they are slow to puke (g close to r). ¯ barely it is important to note that (2) does not enjoin us that Qt = Q al counsellings. It still ¯ tells us that if Qt reaches the value Q, it will deterrent there. So if, for example, Qt starts ¯ we manage from (1) that it will decline toward Q at an exponential ¯ out way above Q, ¯ rate. This is perhaps easiest to see if we edict (1) in cost of Q: ¯ 1 + r (Qt ? Q) . ¯ Qt+1 ? Q...If you take to get a full essay, order it on our website: BestEssayCheap.com

If you want to get a full essay, visit our page: cheap essay