Bubbles and Collateral

Yu Awaya, Jihwan Do and Makoto Watanabe
Additional contact information
Yu Awaya: University of Rochester
Jihwan Do: Yonsei University
Makoto Watanabe: Kyoto University

No 2025rwp-252, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: We construct a model of bubbles where an asset can be used as collateral primarily due to higher-order uncertainty: while both a lender and a borrower know that the intrinsic value of the asset is low, they may still believe that a greater fool exists who will purchase it at a much higher price. We show that such bubbles can lead to inefficient overinvestment under certain conditions. Using this framework, we also examine the impacts of macroprudential policies, as well as other regulatory measures such as interest rate hikes and the resolution of uncertainty.

Keywords: collateral; higher-order uncertainty; speculative bubbles (search for similar items in EconPapers)
Pages: 24pages
Date: 2025-06
New Economics Papers: this item is included in nep-rmg
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