Ruling out divergent speculative bubbles

The growth in the empirical literature on testing for divergent (in mean) speculative bubbles indicates that existing theoretical arguments for ruling out such price paths are not sufficiently compelling. Here we strengthen the case for ruling out explosive or implosive bubbles a priori by filling in two gaps. First, we demonstrate why divergent stochastic bubbles arising from purely extrinsic uncertainty [as in Blanchard (1979)] cannot be equilibria in a monetary optimizing model. Second, we show why existing arguments for ruling out implosive price bubbles are insufficient in some cases, and we provide stronger arguments.