Asset bubbles, economic growth, and a self-fulfilling financial crisis

Takuma Kunieda and Akihisa Shibata

Journal of Monetary Economics, 2016, vol. 82, issue C, 70-84

Abstract: A tractable model in which asset bubbles can exist in spite of infinitely lived agents is presented. An intrinsically useless asset has a positive value and raises welfare because it helps investors with idiosyncratic productivity to obtain more credit in imperfect financial markets. However, the bubbly equilibrium is only the second best. Moreover, bubbles may burst, and this leads to recessions. The model׳s analytical solution allows for the study of many policies. We find that a policy of purchasing the asset avoids financial crises but nevertheless results in the second-best outcome. A policy that taxes depositors and subsidizes investors both prevents crashes and achieves the first-best outcome.

Keywords: E32; E44; O41; Keywords:; Financial market imperfections; Economic growth; Financial crisis; Asset bubbles; Government policy (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (41)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:82:y:2016:i:c:p:70-84

DOI: 10.1016/j.jmoneco.2016.07.001

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