This paper develops a general equilibrium model to examine the quantitative effects of speculative bubbles on capital … late 1990s. The welfare cost of speculative bubbles depends crucially on parameter values. Bubbles can improve welfare if …, the welfare cost of bubbles is large, typically exceeding one percent of annual consumption …

never been tested on a large scale dataset. Thus, guided by economic theory, this paper is the first to design a large …

. The latter is more likely if bubbles develop along the expansionary path. These (rational) bubbles can emerge even when …

. The latter is more likely if bubbles develop along the expansionary path. These (rational) bubbles can emerge even when …