Are speculative bubbles welfare improving? A note on Wang and Wen (2012)

Abstract

Wang and Wen (2012) show in a DSGE model that the existence of speculative bubbles are welfare improving. In their steady state analysis of the benchmark model the authors claim the existence of a unique steady state in the bubble equilibrium with a higher capital stock and hence higher output compared to the fundamental equilibrium. This is due to higher investment efficiency because firms can use bubble assets as a store of value when they are hit by an adverse investment shock. In this note we demonstrate that this claim is at odds with our finding of the existence of an additional, less favorable, steady state in the bubble equilibrium. In the new steady state, allocations are very similar to the steady state without bubbles, which implies a deterioration of investment efficiency, if the economy is in the new, less favorable bubble steady state.