Bubbles and cycles in the Solow-Swan model

We consider a neoclassical one-sector economy in which-in addition to physical capital-there exists a second asset. This asset is unproductive, cannot be consumed, and does not pay dividends. A no-arbitrage condition is imposed so that the two assets are equivalent stores of value. Finally, we assume that consumption (respectively, investment) is a fixed fraction of the sum of aggregate factor income (GDP) and capital gains. In this modified Solow-Swan model, we characterize the conditions under which bubbles can exist, i.e., under which the useless asset can have a positive price. We find that these conditions do not imply that the original Solow-Swan equilibrium is dynamically inefficient, and we demonstrate that asset price bubbles can lead to non-monotonic and even periodic capital accumulation paths.