The name is absent

2.1 Uncertainty in a model with investment

In this paper, we use (Dupor 2005)’s DSGE model with capital accumulation
to evaluate the performance of monetary policy rules when a bubble bursts. In
Dupor’s model, expectations of future returns to investment may be affected by
unwarranted views about future productivity, resulting in “irrational exuberance”
and overinvestment. Below we briefly sketch the model, referring the reader to
(Dupor 2005) for further details.

The model’s “household-firms” are simultaneously consumers (utility maximizers
subject to a budget constraint) and producers (under monopolistic competition).
They sell labour, and hire the labour used in production, in a competitive
labour market, while the capital stock is rented from “investment-firms”.

Investment-firms are responsible for capital accumulation decisions. Dupor
assumes there are costs of adjusting capital, represented by a function Φ. The
investment-firms’ period profit is given by receipts from renting capital (rtkt),
minus investment expenditure (kt+1 - (1 - δ) kt, where δ is the depreciation
rate), minus capital adjustment costs:

Investment-firms maximise discounted expected profits:

∞

zt + Et X [ ^βt+j ⁵1+j ]                            (2)

j=1

where β_t+j is the discount factor and z5_t+j is the process investment-firms expect
profits to follow in the future. The following assumption is used:

zt+j = θt+jrt+jkt+j + (1 — ^δ) kt+j ^- kt+j+1 ^{- φ} I j+j + ) kt+j       (3)

kt+j

The factor θ_t+j is the crucial element: it represents non-fundamental shocks
(when θt+j 6= 1) that distort investment decisions. Dupor uses a (log-)linear

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