Let G > 1 be the long run growth rate of the economy and γ > 0 the reciprocal of the elasticity of substitution between consumption and housing, which in the model also equals the elasticity of rent with respect to income. [...] The budget constraint of the old (2.1b) states that the old consume the endowment and the income from renting and selling housing. [...] The threshold for the nonexistence of fundamental equilibria is determined by equating the marginal rate of intertemporal substitution to the rent growth rate Gγ, which is precisely the condition (3.7). [...] Because the young are saving through the purchase of housing, the lowest possible interest rate in the economy is the autarkic interest rate. [...] In the bubbly equilibrium, the housing price grows faster than the rent and is disconnected from fundamentals in the sense that the housing price is asymp- totically independent of the preferences for housing.
- Pages
- 53
- Published in
- Japan
