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Asset bubbles and bailouts

Tomohiro Hirano (), Masaru Inaba and Noriyuki Yanagawa

Journal of Monetary Economics, 2015, vol. 76, issue S, S71-S89

Abstract: As long as bubble size is relatively small, bubbles increase production level, but once the size becomes too large, then bubbles reduce it. Given this non-monotonic relationship, this paper investigates the relationship between bubbles and government bailouts. It shows that bailouts for bursting bubbles may positively influence ex ante production efficiency and relax the existence condition of stochastic bubbles. The level of bailouts has a non-monotonic relationship with production efficiency and a “partial bailout” policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously and shows that even non-risky bubbles may be undesirable for taxpayers.

Keywords: Bubble size; Anticipated bailouts; Production efficiency; Boom–bust cycles; Optimal bailout policy (search for similar items in EconPapers)
Date: 2015
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Related works:
Working Paper: Asset Bubbles and Bailouts (2015) Downloads
Working Paper: Asset Bubbles and Bailouts (2014) Downloads
Working Paper: Asset Bubbles and Bailouts (2012) Downloads
Working Paper: Asset Bubbles and Bailout (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:76:y:2015:i:s:p:s71-s89

DOI: 10.1016/j.jmoneco.2015.09.008

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