Income Distribution by Age Group and Productive Bubbles

The aim of this paper is to study the role of the distribution of income by age group on the existence of speculative bubbles. A crucial question is whether this distribution may promote a bubble associated to a larger level of capital, i.e. a productive bubble. We address these issues in a three period overlapping generations (OG) model, where productive investment done in the first period of life is a long term investment whose return occurs in the following two periods. A bubble is a short term speculative investment that facilitates intertemporal consumption smoothing. We show that the distribution of income by age group determines both the existence and the effect of bubbles on aggregate production. We also show that fiscal policy, by changing the distribution of income, may facilitate or prevent the existence of bubbles and may also modify the effect that bubbles have on aggregate production